But Netanyahu repeated in a nationally broadcast interview his groundbreaking statement saying that he. But at the same time, he told NBC's "Today" show in an interview from Jerusalem that it would have to be a demilitarized state.
On the issue of further Jewish settlements in territory the Palestinians wish to claim as their own in a new state, Netanyahu said "I think I made it also clear that I would not build new settlements." He said that he and President Barack Obama are trying to resolve that issue.
(Netanyah discussed Israeli security, settlements, Palestinian statehood and more in anwith CBS News correspondent Jeff Glor Monday.)
Netanyahu said his vision is of separate Jewish and Palestinian states, living side by side in harmony, "not enmity."
The prime minister said his concern about Israel's security "is not a political exercise."
"We've got an enclave in Gaza and we can't have rockets in Tel Aviv," he said.
Netanyahu said that Israel has been pummeled by attacks from its Palestinian territories, telling NBC's Ann Curry: "Let's just think about seven rockets in New York, not to mention 7,000 in Tel Aviv ... Of course, that's (demilitarized zone) a requirement for peace."
On the issue of new settlements in the West Bank, he said, "This is a subject that I have discussed with" Washington.
"I think that President Obama and I are trying to reach a common understanding of this," he said. "I think we'll find some common ground."
For Netanyahu - who has argued that the world's big worry should be Iran and not his country's own unresolved conflict here - Mahmoud Ahmedinejad's re-election drove the point home, reports CBS News correspondent Richard Roth.
Netanyahu was moving with the public mood when he finally conceded there could be a Palestinian state - with a flag and a national anthem, as he put it - but not with an army.
"That's a big deal and that's a big step for him," Yehuda Ben-Meir of the Institute for National Security Studies told Roth.
Netanyahu has clearly felt pressure - from President Obama, who wanted him to go further and freeze construction in West Bank settlements on the one hand, and from Israeli settlers, who feared he might actually do that, on the other.
When it comes to feeling squeezed, though - Palestinians say their experience can't be matched. And inside the barricade today that Israel calls a security fence and Palestinians call a prison wall, Netanyahu's big step was just another big disappointment, Roth reports.
"The only word he mentioned that some people considered positive was the issue of the state but he didn't mean a state. All the conditions he put made it not a state but a ghetto," Mustafa Barghouti, a member of the Palestinian Parliament, told Roth.
The caveats of disarming the Palestinian territories, recognizing Israel as a Jewish state and taking Jerusalem off the table may be non-starters for the Palestinians. That's puzzling to Israeli officials.
"Well, I don't understand why recognizing Israel as a Jewish state is a non-starter. Israel is being asked to recognize the Palestinian right to self determination," Michael Oren, Israeli ambassador to the U.S., said Monday on CBS' The Early Show. "I honestly can't see a peace treaty that's not based on mutual recognition. As for disarmament, we're in a dangers part of the world.
"We can't have a situation where a Palestinian state will import rockets such as Hamas has done and shell the cities."