"It is impossible to expect us to agree in advance to the principle of a Palestinian state without assurances that this state will be demilitarized. On a matter so critical to the existence of Israel, we must first have our security needs addressed," he said at Bar Ilan University outside Tel Aviv.
Until this point, Netanyahu had resisted expressing support for a Palestinian state, despite pressure from President Barack Obama. Netanyahu's speech came 10 days after President Obama said the creation of a Palestinian state was the "only resolution" for the Arab-Israeli conflict and that he would become personally involved in peacemaking, according to Bloomberg News.
In his address, Netanyahu also said he would support finding economic solutions to Palestinian problems.
"If the Palestinians turn toward peace -- in fighting terror, in strengthening governance and the rule of law, in educating their children for peace and in stopping incitement against Israel -- we will do our part in making every effort to facilitate freedom of movement and access, and to enable them to develop their economy," he said.
Nabil Abu Rudeina, a spokesman for Palestinian Authority President Mahmoud Abbas, said Netanyahu's conditional acceptance of a Palestinian state will "not lead to a just and comprehensive peace," quoted Bloomberg News.
On Sunday, White House spokesman Robert Gibbs said President Obama welcomed Netanyahu's comments and would work with all parties to see that they fulfill their obligations and head toward regional peace, reported the Associated Press.
Several European Union foreign ministers also welcomed Netanyahu's conditional endorsement of a Palestinian state but that it was not enough to raise EU-Israeli ties to a higher level.
"That's good but it's only a first step," said Swedish Foreign Minister Carl Bildt, whose country is set to take over the EU presidency in July, Reuters reported.
French Foreign Minister Bernard Kouchner said, "Nothing was said on the settlements ... but this stopping of the settlements is essential."
President Obama has called on Israel to stop building settlements in the occupied West Bank, but Netanyahu has so far rejected such calls.