Efforts made by Palestinian President Mahmoud Abbas to achieve national unity with Hamas were criticized by Netanyahu during an interview with CNN Thursday.
He said Hamas wishes to destroy Israel.
"What do I negotiate with Hamas, the method of our termination … can you you imagine a peace deal with al-Qaida?" the prime minister said.
"You can make peace with an enemy if the enemy abandons the idea of destroying you. That is the critical test."
Any country would make a stand against someone seeking to obliterate it he said.
Concerning the breakdown in talks to reach a peace deal with the Palestinians, Netanyahu said from the first day he took office he called on Abbas to negotiate.
He said the controversial West Bank settlement issue is an artificial one and that the area involved covers just 1 to 2 percent of the entire West Bank.
"I recognize the principle of two states for two people," Netanyahu said. "I agreed to another extension [of the settlement freeze] … I did all these things. And what do I find? That the Palestinians can walk away from the negotiations, make pre-conditions, call a public square in honor of terrorists and now they are talking about a national unity with Hamas that calls for our destruction. How can you be for peace with Israel and peace with Hamas that calls for our destruction?"