Arab Israelis "who decide their identity is Palestinian can relinquish their Israeli citizenship and become citizens of the future Palestinian state," Lieberman said in manifesto of his Israel Beitenu party.
"The state of Israel should even encourage them to do so with a system of economic incentives," he added.
The text said only a peace "package deal" with Arab states and "land and population swaps of Arab Israelis" will ensure stable peace.
Lieberman has over the years time and again said any comprehensive regional peace plan would have to entail population exchanges to ensure "maximal separation" between Jews and Arabs in Israel.
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Israel's 1.7 million Arab citizens, who make up over 20 percent of the population, are Palestinians who remained in the country following the creation of the Jewish state in 1948, along with their descendants.
Lieberman has long professed revoking citizenship from Arab Israelis who are not sufficiently "loyal" to the state, and last month called on Arab MPs to quit the Israeli political system.
His party has over the years advanced a series of laws enabling courts to revoke the citizenship of anyone convicted of treason or preventing people who have not served in the military or civilian service from being members of the parliament, which are seen as targeting Israel's Arab minority.
On Sunday the government endorsed a proposal to enshrine in law the country's status as the national homeland of the Jewish people which faces parliamentary debate and voting.
Critics have said the law will weaken democracy in Israel and could institutionalise discrimination against Israel's Arab citizens.