Israeli Prime Minister Benjamin Netanyahu speaks during his meeting with President Barack Obama in the Oval Office of the White House in Washington. (AP Photo/Pablo Martinez Monsivais)

Washington - Israel's Benjamin Netanyahu on Tuesday directly urged Palestinian president Mahmud Abbas to recognize Israel as a Jewish state and to “abandon the fantasy” of flooding Israel with refugees.

But his remarks sparked a furious reaction from the Palestinians who denounced his demand and said it had effectively put the final nail in the coffin of the US-led peace talks.

Addressing delegates at the annual policy conference of AIPAC, Netanyahu said he was prepared to make an “historic peace,” but not without a Palestinian acceptance of the Jewish state.

“It's time the Palestinians stopped denying history,” he said, returning to a major point of disagreement in peace talks, which have struggled to make headway ahead of a looming April deadline.

“President Abbas: recognize the Jewish state and in doing so, you would be telling your people.. to abandon the fantasy of flooding Israel with refugees,” he said.

“In recognizing the Jewish state you would make clear that you are truly prepared to end the conflict.. No excuses, no delays, it's time.”

But top Palestinian official Nabil Shaath told AFP that Netanyahu's demand for such recognition, and his insistence on keeping Israeli troops along the Jordan Valley in a future Palestinian state, were “totally rejected.”

Speaking to AFP, he said Netanyahu's speech was tantamount to an “an official announcement of a unilateral end to negotiations.”

Israel has repeatedly insisted there will be no peace deal without addressing the issue of recognition, but the Palestinians have rejected the demand, which they say will deny their historical narrative and compromise the right of return for their refugees.

Netanyahu also alluded to Israel's demand to retain a military presence along the Jordan Valley, which runs down the eastern flank of the West Bank, in any future deal saying he would not cede security to foreign peacekeepers.

“If we reach an agreement with the Palestinians, I don't delude myself. That peace will most certainly come under constant attack by Hezbollah, Hamas, Al Qaeda and others,” he said

Hezbollah is an Iranian-backed Lebanese Shiite movement, Hamas the Palestinian Islamist movement which rules Gaza and Al-Qaeda a loose global network of Islamist extremists.

“Experience has shown that foreign peace-keeping forces, keep the peace only when there is peace, but when subjected to repeated attacks, those forces eventually go home,” he said.

“The only force that can be relied on to defend the peace.. is the force defending its own home: the Israeli army.”

Netanyahu also made a rare reference to the opportunities that a peace deal would open up for Israel, including “the possibility of establishing formal ties with between Israel and leading countries of the Arab world.

“Many Arab leaders today already realise that Israel is not their enemy, but peace with the Palestinians would turn our relations with them and with many Arab countries into open and thriving relationships,” he said in remarks with a positive tone more commonly heard from Israeli President Shimon Peres.

“The combination of Israeli innovation and entrepreneurship could catapult the entire region forward. I believe together we could solve the region's water and energy problems.”

He also had strong words for the Palestinian-led movement to boycott Israel over its activities in the occupied territories.

“The BDS movement is not about legitimate criticism, it's about making Israel illegitimate,” he said, reeling off a list of south American countries flocking to do business with Israel alongside a large number of hi-tech giants.

“That movement will fail,” he said, describing the movement as a stumbling block for peace.

In an interview published Sunday, Obama warned that if peace talks were to fail and Israel continued building settlements, it would face an international backlash, referring to growing moves, particularly in Europe, to boycott the Jewish state.