Prime Minister Benjamin Netanyahu offered Monday to halt settlement construction if the Palestinians were to recognize Israel as a Jewish state, but the Palestinian leadership was prompt to reject the proposal.

"If the Palestinian leadership will say unequivocally to its people that it recognizes Israel as the homeland of the Jewish people, I will be ready to convene my government and request a further suspension," Netanyahu said while speaking at the opening of the third session of the 18th Knesset.

"Just as the Palestinians expect us to recognize their state, we expect reciprocal treatment," said Netanyahu.

"This is not a condition but a trust-building step, which would create wide-ranging trust among the Israeli people, who have lost trust in the Palestinian will for peace over the last 10 years."

However, Nabil Abu Rdainah, spokesman for Palestinian President Mahmoud Abbas, said a return to U.S.-backed peace talks required a freeze on settlement building by Israel.

"The issue of the Jewishness of the state has nothing to do with the matter," Rdainah said.

Netanyahu stressed that Israel is willing to make concessions, and that a peace deal and a Palestinian state could be achieved if the Palestinians would be willing to recognize Israel as the Jewish homeland.

"The Palestinians wasted 10 months and now they demand to continue the [settlement] freeze. I hope their demand isn't a ploy to avoid the concessions that must be made in order to achieve a peace deal."

The prime minister also praised Israel as a perfect example of a democratic country that treats all its citizens equally.

"The Zionist state erected an exemplary democracy," said Netanyahu during his speech before the Knesset. He said that in Israel, "Jews and non-Jews alike enjoy equal rights under law."

The prime minister emphasized the importance of Israel as a Jewish state and reminded the plenum that David Ben-Gurion erected the state as a country for the Jews, not only as a country with Jewish residents.

"Israel is the Jewish homeland and is also democratic to all its citizens – not other country ensures the rights of its minority population like we do," Netanyahu said.

Meanwhile, Kadima Chairwoman Tzipi Livni criticized Netanyahu for his "lack of leadership" during her speech before the Knesset.

"You refuse to pay a political price [for the peace process]… If your main interest is the coalition, you will not be able to make the right decisions," said Livni.

Livni also blamed Netanyahu for eroding Israel's international status. "You have turned Israel into a weak, fearful state which is losing its friends in the world, which defies the leader of the free world, the source of its strength."

"Perhaps you have led Israel to this position out of weakness, due to your inability to make a decision and take a stand," said Livni.

President Peres also spoke before the Knesset, and stressed the need for a two-state solution.

"With all the pain and hardship involved, there is a majority [in the Knesset] for the principle of two states for Israelis and Palestinians," said Peres.

"There are those who claim that continuing building in the settlements contradicts a two-state solution. In order to resolve this issue I believe it is crucial to agree on the peace map as soon as possible."

When Peres made his comments on the settlement freeze, he was interrupted by Right wing MKs Ya'akov Katz, Uri Ariel and Michael Ben Ari, who then left the Knesset assembly.