The victims had been celebrating Passover
At least another 100 have been injured, 26 seriously, after the blast, which happened at the Park Hotel in the centre of the town.
The Palestinian leadership condemned the attack and promised to take "action against any Palestinian group responsible for this operation".
The Islamic militant group Hamas has claimed responsibility for the bombing, which took place just after sunset on Wednesday as Israelis started celebrating the week-long Passover holiday.
The attack came as Arab leaders held a summit in Beirut to endorse a Saudi Arabian peace initiative for the Middle East.
Israeli reaction
Israeli Defence Minister Binyamin Ben-Eliezer met with army commanders early Thursday to weigh a possible Israeli response.
The Israeli authorities blamed the attack on Palestinian leader Yasser Arafat.
Israeli Government spokesman David Baker said: "Arafat is to blame for the violence that emanates from the territories under his control."
"It is clear the Palestinians are bent on using everything at their disposal for killing and maiming as many Israelis as possible anywhere, anytime."
The Palestinian leadership denounced the attack.
According to a statement from a Palestinian official, Yasser Arafat has ordered the arrest of four key militants from the Islamic groups Hamas and Islamic Jihad - as well as suspects from the al-Aqsa Martyrs Brigade, a militia group with links to Mr Arafat's Fatah movement.
Jibril Rajoub, head of Palestinian Preventive Security in the West Bank, said that while he condemned the attacks, the Israeli occupation "breeds terrorism".
He said "the frustrations, suffering and pain imposed by Sharon pushes some Palestinians to carry out such attacks".
UN Secretary General Kofi Annan described the attack as "repugnant".
US President George W Bush said it was a "cold-blooded killing". He reiterated that Mr Arafat should do everything in his power to halt such violence.
The BBC's Nick Childs in Jerusalem says the bomb attack will deal a severe blow to US efforts to bring Israel and the Palestinian Authority together for peace talks.
Explosive belt
The bomber has been identified as Abdelbasset Odeh, a 25-year-old Hamas member from the West Bank town of Tulkarem.
He made his way past an armed guard at the hotel entrance who did not consider him suspicious, Israel TV said.
Before the guests had chance to sit down, he walked into the dining room and detonated the bomb.
The explosion blew debris onto the street, and left the room in ruins.
"Suddenly it was hell," said one of the guests, Nechama Donenhirsch. "There was the smell of smoke and dust in my mouth and a ringing in my ears."
Netanya is a popular coastal resort, where many Israeli families gather to celebrate Passover.
Some 10,000 police were on high alert for the holiday, but were not specifically deployed in Netanya.