What he meant was that Jews have a historical tie to the land and so do Palestinians and Palestinians recognize the mutual ties and historical presence on the land of Palestinians and Jews. He wasn't say that he recognizes Israel as a Jewish state. Let's not take religion out of context. Palestinians recognize that Jews have a legitimate religion and a right to their beliefs, a history there, and so do Palestinians.
Netanyahu condemns West Bank arson attack, calling it 'terror' (Haaretz)
from the article: Abbas: We demand an end to Gaza siege; entire world stands with us