"Peace rests on security. It is not based on good will or legitimacy as some think. It is based, first and foremost, on our ability to defend ourselves," he said at a ceremony to mark the 109th anniversary of the death of Theodor Herzl, the founding father of Zionism.
The Likud party leader's remarks came as US Secretary of State is due to arrive in Jerusalem later today for a fifth round of talks in his ongoing effort to restart Israeli-Palestinian negotiations which collapsed in 2010 over the issue of Israel's settlement policy.
"Israel wants peace and doesn't want a bi-national state, but let's not fool ourselves into believing that if we reach an agreement with the Palestinians it will eliminate the unbridled defamation against the Jewish state," he said.
Left-leaning Israeli daily Ha'aretz today reported that a senior cabinet minister from Netanyahu's party has said that the Israeli leader would be willing to withdraw from most of the West Bank and evacuate numerous settlements as part of an agreement with the Palestinians, as long as his security demands were satisfied.
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"Netanyahu understands that for a peace agreement, it will be necessary to withdraw from more than 90 per cent of the West Bank and evacuate more than a few settlements," he said.
The minister also said the issue of security arrangements is Netanyahu's main concern, and this will be his main demand in the negotiations.
"If his security demands are met, he is prepared to make significant territorial concessions," the minister said.