The idea, while innocuous to Israel's supporters, is widely seen as undermining the rights of Arab Israelis, and was immediately rejected by the Palestinians. But it could signal that Netanyahu is willing to bend and save a U.S.-led peace effort in exchange for a different concession.

The expiration of Israel's 10-month moratorium on new settlement building two weeks ago thrust the month-old U.S.-led peace negotiations with the Palestinians into crisis. The Palestinians are refusing to continue negotiating with Israel as long as settlement building continues, but Netanyahu has insisted the curb on construction was a one-time gesture.

The U.S. administration has been scrambling for weeks to find a creative way out of the quagmire and satisfy both sides and has put heavy pressure on Netanyahu to extend the slowdown, while offering a slew of incentives.

In a policy speech marking a new session of parliament, Netanyahu offered his own formula to move forward.

"If the Palestinian leadership would say unequivocally to its people that it recognizes Israel as the national homeland of the Jewish people, I will be willing to convene my government and ask for an additional suspension," he said, in a speech that was heckled by some lawmakers.