"Yesterday, you raised a very great idea ... It's a creative idea, I like it," he told FIFA president Sepp Blatter at a press conference in the West Bank city of Ramallah.
"But we have to pave the road for that, we have to prepare the environment. But this should be an endgame, this should be a purpose for you and I urge you not to give up," he said.
The idea was raised by Blatter on Tuesday at a joint press conference with the head of the Israel Football Association, Ofer Eini.
"We would be happy - FIFA in Zurich - to accept the organisation of such a competition," Blatter said, indicating that Netanyahu had pledged to attend the match, if it took place.
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"He said that if a game will be played between Palestine and Israel and we organise it in Zurich, he will be there," the 79-year-old football chief said.
Blatter is wrapping up two days of top-level talks aimed at resolving a dispute over a bid by the Palestinian Football Association to have its Israeli counterpart suspended from FIFA, world football's governing body.
The PFA wants FIFA to bar Israel from international competition over its restrictions on the movement of Palestinian players.
It is also protesting the participation in the Israeli national championships of five clubs located in Jewish settlements in the occupied West Bank. The clubs play in the third and fourth divisions.
Israel has denounced the bid as an attempt to mix politics and sport, saying such matters had not place within FIFA.