Binyamin Netanyahu says he's perplexed by the claim that Jewish communities in the West Bank are an obstacle to peace.
But Palestinian officials and the United States have responded sharply to his comments.
Palestinian Authority President Mahmoud Abbas hit back immediately, saying Israel is the one committing ethnic cleansing and is being internationally isolated as a result.
That charge was reinforced by one of his senior aides, Saeb Erekat.
"Look at what's happening in East Jerusalem, what's happening in our villages, towns, and the creation of the apartheid wall. There are roads in the West Bank that we cannot use any more as Palestinians, only Israelis can use them," he said.
"There is a deeper apartheid system being created in the occupied Palestinian territories than that which existed in South Africa."
, Mr Netanyahu expressed disbelief that West Bank Jewish settlements, in the places he called Judea and Samaria, were considered an obstacle to peace when there are almost two million Arabs living in Israel.
"Israel's diversity shows its openness and readiness for peace. Yet the Palestinian leadership actually demands a Palestinian state with one pre-condition: no Jews," he said
There's a phrase for that. It's called ethnic cleansing. And this demand is outrageous. It's even more outrageous that the world doesn't find this outrageous."
Israeli PM Benjamin Netanyahu. (AAP)
Israel has been widely criticised, including by close ally the United States, for building settlements in territories it captured in 1967 - land the Palestinians want as part of their future state.
US State Department spokeswoman, Elizabeth Trudeau, has described Mr Netanyahu's language as "inappropriate and unhelpful", saying settlement activity continues to hamper the peace process.
"Let's be clear, the undisputed fact is that already this year, thousands of settlement units have been advanced for Israelis in the West Bank, illegal outposts and unauthorised settlement units have been retroactively legalised, more West Bank land has been seized for exclusive Israeli use," she said.
"There has been a dramatic escalation of demolitions resulting in over 700 Palestinian structures destroyed, displacing more than 1,000 Palestinians. As we've said many times before, this does raise real questions about Israel's long-term intentions in the West Bank."
Israel's National Infrastructure, Energy and Water Minister, Yuval Steinitz, has jumped to his leader's defence.
"With all due respect to our best friends in the United States, I think they're wrong," he said.
"You shouldn't underestimate Palestinian incitement and the Palestinian vision of cleaning, sooner or later, not just Judea and Samaria (West Bank) but entire Palestine or the entire land of Israel from the Jews."
Palestinian authorities have urged the world to respond to the video by taking action against Israel.
They want a UN Security Council resolution condemning its settlements and prosecution in the International Criminal Court.
-with Agencies.
