Mr Netanyahu has offered "economic peace", not statehood, to Palestinians
Israel's new PM says he will discuss a Palestinian state only if Palestinians recognise Israel as a Jewish state.
Benjamin Netanyahu was speaking to US President Barack Obama's envoy to the Middle East about prospects for peace.
Mr Netanyahu, of the right-wing Likud party, has not previously endorsed the creation of a Palestinian state.
The envoy, George Mitchell, reiterated US support for a Palestinian state alongside Israel, in talks with the Israeli president and foreign minister.
But Foreign Minister Avigdor Lieberman said the diplomatic process was at a "dead end" and a new approach was needed.
A senior official in Mr Netanyahu's office quoted the new prime minister as telling Mr Mitchell: "Israel expects the Palestinians to first recognise Israel as a Jewish state before talking about two states for two peoples."
The US envoy is having dinner with Mr Netanyahu on Thursday before travelling to the West Bank for talks with Palestinian leaders on Friday.
Mr Mitchell arrived in Israel to a changed political landscape, says the BBC's Tim Franks in Jerusalem.
Senior Israeli and Palestinian figures doubt each other's ability and will to come to a full peace deal, our correspondent adds.
In a BBC interview, Israeli deputy Foreign Minister Danny Ayalon confirmed that the new government was committed to the 2003 roadmap peace plan, which outlines a staged peace process leading to the establishment of a Palestinian state.
Mr Ayalon said the end goal of the plan was "absolutely" a Palestinian state, but stressed that also "we must ensure our survival here as a Jewish state".
Mr Mitchell's first meeting on Thursday was with President Shimon Peres.
He assured the president of Washington's "absolute and strong commitment" to Israel's security.
Israeli FM Avigdor Lieberman (left) said a new approach to peace is needed
"We are committed to two states for two peoples living alongside each other in security and peace," Mr Mitchell said, according to a statement from Mr Peres's office.
Mr Peres told him that "no door to peace" had been closed and called 2009 a "decisive year in the Middle East".
However his upbeat tone appeared to contrast with the message from Foreign Minister Lieberman, who has rejected the previous Israeli government's pledge in 2007 to work towards a Palestinian state under then-US President George W Bush.
Mr Lieberman told Mr Mitchell that "the traditional approach has so far brought neither results nor solutions," the ministry said in a statement.
"The Israeli government will have to formulate new ideas and a new approach," Mr Lieberman added.
"We anticipate close co-operation and co-ordination with the US administration."
Iran was also discussed at both meetings.
Mr Peres dismissed as "nonsense" speculation that Israel was planning to attack Iran over its nuclear programme.
He said the solution with Iran was "not military", and progress with Tehran depended on international co-operation.
Mr Mitchell is due to meet Mr Netanyahu, who leads a right-leaning coalition combining the centre-right, centre-left and far-right parties.
Mr Netanyahu has said the economy in the Israeli-occupied West Bank should be improved before progress on creating a Palestinian state is attempted.
He has said he intends to resume talks and co-operation to promote "economic peace".
Israel committed itself in 2003 to the establishment of a Palestinian state under the "roadmap" peace plan.
After meeting Israeli leaders, Mr Mitchell will hold talks with Palestinian Authority President Mahmoud Abbas and Prime Minister Salam Fayyad in Ramallah on Friday.
On Saturday, chief Palestinian negotiator Saeb Erekat reiterated his administration's position that, for peace talks to resume, Israel must declare its support for a two-state solution.