The proposal would mean Israel would no longer be defined in its Basic Laws as "Jewish and democratic" but instead as "the national homeland of the Jewish people."
Critics, who include the government's top legal adviser, say the proposed change to the laws that act as Israel's effective constitution could institutionalise discrimination against its 1.7 million Arab citizens.
By giving preeminence to the "Jewish" character of Israel over its democratic nature, the law in its current format is "anti-democratic," they say.
"There are those who would like the democratic to prevail over the Jewish and there are those who would like the Jewish to prevail over the democratic. And in the principles of the law that I will submit today, both of these values are equal and both must be considered to the same degree," he said.
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As well as Netanyahu presenting his own vision of the bill to the cabinet, ministers were to be asked to vote on two other more extreme versions of the proposed law, drafted by far-right members of his Likud party.
Israel's Arab minority, who make up around 20 per cent of the population, are descendants of the Palestinians who remained on their land after the establishment of Israel in 1948.
If the proposal becomes law, it would mean "the institutionalisation of racism, which is already a reality on the street, in both law and at the heart of the political system," warned Majd Kayyal of Adalah, the Legal Centre for Arab Minority Rights in Israel.
"Democracy guarantees that all citizens have the same rights and are equal before the state but this racist change introduces a distinction on the basis of religion," he said.