"The Palestinians are continuing their campaign of inciting hatred, as we have seen in the last few days with their refusal to recognise Israel as a state for the Jewish people," Netanyahu told a weekly cabinet meeting.
"This is the main issue that we're discussing with (Kerry). Among other key topics are Israel's security, which must remain in its hands," he added, in comments broadcast by public radio.
Netanyahu's remarks came as Kerry left Israel for neighbouring Jordan after three days of intense shuttle diplomacy between Israeli and Palestinian leaders.
Kerry was on his tenth visit to the region since taking office, having kick-started direct negotiations in July after a three-year hiatus.
Kerry has pledged to work even more intensively in the coming months, in a bid to thrash out a framework agreement for final status talks with an April deadline looming.
Palestinian leaders have refused to recognise Israel as a Jewish state, arguing that to do so might compromise the rights of Israeli Arabs and the "right of return" for Palestinian refugees.
"We know that we have to reach an agreement, but this agreement cannot put into doubt the right of the Jewish people to a state," Netanyahu said.