In an interview today on US television, Netanyahu said he wanted to reduce the differences between his government and Barack Obama on settlements.
"President Obama and I are trying to reach a common understanding on this," Netanyahu said. "I think we'll find some common ground."
The White House described his speech as "an important step forward" and the EU said it was "a step in the right direction", although plans to upgrade trade relations between Israel and Europe remain frozen.
But Palestinian officials were dismayed and called on the international community to challenge Israel.
"The international community should confront this policy, through which Netanyahu wants to kill off any chance for peace," said Yasser Abed Rabbo, an adviser to the Palestinian president, Mahmoud Abbas.
He said Netanyahu should be pressed to accept the 2003 US road map, which he notably did not mention in his speech. Nor did he mention the Arab peace initiative, under which the Arab countries offered full diplomatic recognition of Israel in return for a Palestinian state on land occupied by Israel in 1967, with a capital in east Jerusalem and an agreed solution to the fate of Palestinian refugees.
Instead, Netanyahu's vision of a Palestinian state was one that was demilitarised, with no army, and with strict border controls and no military agreements with other states. It would not have a capital in east Jerusalem, and no Palestinian refugees who fled or were forced from their homes in 1948 would be allowed to return to what is now Israel. He did not talk of removing settlements, now home to nearly 500,000 Jewish Israelis in east Jerusalem and the West Bank. Netanyahu also insisted the Palestinians recognise Israel as a Jewish state.
In Cairo, Hosni Mubarak, the Egyptian president, said recognising Israel as a Jewish state effectively meant ruling out any return of Palestinian refugees and "increases the complexity of the matter and aborts the chance for peace".
Within Israel, reaction to Netanyahu's speech was mixed. Some among his rightwing coalition were angry that he even mentioned a Palestinian state, others were encouraged by it.
Most, however, said the future would be determined by actions taken on the ground.