Khaled Meshaal, the leader of Islamist Hamas, made a defiant speech to supporters in the Gaza Strip on Saturday, promising to take "inch-by-inch" all of Israel, which he said he would never recognise.
Mr Netanhyahu said: "We have again been exposed to the true face of our enemies. They have no intention of compromising with us. They want to destroy our country."
The Israeli leader has faced fierce foreign criticism for announcing a wave of Jewish building in the occupied West Bank and East Jerusalem after a de-facto recognition by the UN of a Palestinian state.
But Mr Netanyahu said Israel would never withdraw unilaterally from the West Bank as it did from Gaza in 2005, arguing this would create another territory from which Palestinians could launch rockets at Israeli cities.
"I am always aghast at the delusions of others who are prepared to pursue this process and call it peace," he said.
The Western-backed Palestinian President Mahmoud Abbas has said he is ready to make peace but Hamas's founding charter calls for the destruction of Israel.