A historic peace agreement with the Palestinians would open up the possibility of establishing ties with leading Arab countries, Netanyahu told the American Israeli Political Action Committee policy conference.
"[Peace] with the Palestinians would turn our relations with them and with many Arab countries into open and thriving relationships," Netanyahu said.
Netanyahu said reaching an accord depends on the Palestinian leadership, calling on Palestinian Authority President Mahmoud Abbas to "stop denying history" and recognize Israel as the nation-state of the Jewish people.
"Israel is the nation-state of the Jewish people, where the civil rights of all citizens, Jews and non-Jews alike, are guaranteed," Netanyahu said. "[It's] time the Palestinians stop denying history!"
"Just as Israel is prepared to recognize a Palestinian state, the Palestinians must be prepared to recognize a Jewish state," he said, exhorting Abbas, "recognize the Jewish state!"
"In doing so, you would be telling your people, the Palestinians, that while we might have a territorial dispute, the right of the Jewish people to a state of their own is beyond dispute," he said.
As work continues to forge a peace agreement, Netanyahu said, "I hope that the Palestinian leadership will stand with Israel and the United States on the right side of the moral divide, the side of peace, reconciliation and hope."
"One movement that's definitely on the wrong side of the moral divide is the movement to boycott Israel, so-called BDS," which he said "turns morality on its head."
"Most people in the BDS movement don't seek a solution of two states for two peoples," he said. "They're not seeking peace. They're not seeking reconciliation."
Addressing the "moral divide" separating Israel from its enemies, Netanyahu said terrorist countries and organizations are "steeped in blood and savagery."