A spokesman for Palestinian Authority leader Mahmoud Abbas said Mr Netanyahu had created “more obstacles”.
Mr Netanyahu had told the US Congress that Israel was “willing to make painful compromises” to achieve peace.
But he rejected US President Barack Obama’s call for a peace deal based on pre-1967 borders, plus land swaps.
Reacting to the speech, Abbas spokesman Nabil Abu Rudeina said: “What came in Netanyahu’s speech will not lead to peace”.
He said there was “nothing new” in the speech, “except that he is adding obstacles on the road towards a genuine, serious, lasting and comprehensive peace”.
Palestinian chief negotiator Saeb Erekat said the speech proved Israel could not be a partner for peace in the region.
Mr Erekat said Mr Netanyahu was seeking to “dictate the results” of negotiations before they had begun.
Initial Palestinian reaction to Benjamin Netanyahu’s speech has been scathing. One senior Palestinian official told me it was a declaration of war not peace.
Palestinian leaders already frustrated with America’s role in a stagnant peace process will have been dismayed by the rapturous reception Mr Netanyahu received. Right now the two sides seem very far apart. Neither Israelis nor Palestinians are talking as if they anticipate being back at the negotiating table anytime soon.
Some Palestinian leaders welcomed President Obama’s statement last week that a future Palestinian state should be based on the pre-1967 borders. In this latest speech, Mr Netanyahu again rejected that proposal. Palestinians are still threatening to go to the United Nations to seek recognition of a Palestinian state in September, a move strongly opposed by Israel and the United States.
“He dictated that Jerusalem will be undivided, that refugees cannot return, that his army will remain on the borders, that his settlements will be expanded and kept, that he wants Palestine to be demilitarised,” Mr Erekat said.
The BBC’s Middle East editor Jeremy Bowen says that the speech shows that the gulf between Mr Netanyahu’s view of an acceptable peace deal and that of the Palestinians is as wide as ever.
Mr Netanyahu had said Israel would be “generous on the size of the Palestinian state, but very firm on where we put the border with it”.
Speaking to a supportive bipartisan audience at the US Capitol in Washington, Mr Netanyahu urged Mr Abbas to “tear up” a recent reconciliation agreement with Islamist party Hamas, which controls Gaza.
He said Israel could not make peace with a faction that did not recognise its right to exist.
But a Hamas spokesman dismissed his remarks.
“The true response to this arrogant speech which denies Palestinian rights should be the complete ending of all negotiation and the implementation of [Palestinian] reconciliation as soon as possible,” Sami Abu Zuhri told AFP.
President Abbas is due to meet leaders of the PLO and his Fatah movement on Wednesday to consider how to pursue an attempt to seek recognition for statehood by the UN in September.
Mr Abbas has said that he would prefer to establish a state through negotiations, and suggested that he is being forced into taking this unilateral step by Israel’s refusal to engage.
But US President Barack Obama said he would not support such a move, which fails to address and resolve fundamental issues with Israel.
Mr Netanyahu said he remained committed to a two-state solution to the conflict, in which an independent Palestinian state sits alongside a Jewish state.
“I’m willing to make painful compromises to achieve this historic peace,” he said. “We seek a peace where [the Palestinians] will be neither Israel’s subjects nor its citizens.”
But he said the future border could not rest at Israel’s “indefensible” 1967 lines, because many Israelis now live in suburbs of Tel Aviv and Jerusalem beyond Israel’s pre-1967 territory.
He said the precise border must be drawn at the negotiating table, but said it would be different from the 1967 border.