"It didn't happen," Netanyahu said at the court in Tel Aviv, where he and his wife entered under tight security to testify in their defamation suit against the journalist who made the claim on social media.
His hands behind his back, his face tense, Netanyahu said: "It is so false, so absurd, ridiculous."
The case has been closely followed by the Israeli media, with the unusual scene of a sitting prime minister and his wife, Sara, testifying in court over such a claim making headlines.
It follows a post by a journalist on his Facebook account last year making the claim, resulting in the Netanyahus' defamation suit.
The journalist, Igal Sarna, posted that a fight between the Netanyahus had occurred while they were travelling in the premier's official convoy on a highway between Tel Aviv and Jerusalem.
According to Sarna, who works for the popular Yediot Aharonot newspaper, Netanyahu, 67, was forced out of the car amid shouting.
The Netanyahus, who married in 1991 and have two sons together, are a frequent topic of gossip and rumours among Israelis.
The claim may not have been given the attention it has received if not for the lawsuit, but Netanyahu said he wanted the truth to be known in this instance.
They are suing for 280,000 shekels ($76,000, 72,000 euros).
Netanyahu held his wife's hand when arriving at the courtroom, where dozens of people were kept out due to a lack of space.
During his testimony, he denounced what he called the "vulgar lie... that led me here".
Questioned by Netanyahu's lawyer, Sarna said he believed "more than ever" that the incident had occurred.
Asked why he had not produced any witnesses to corroborate the story, the journalist said that his sources "do not want to come. I cannot force them to come."
He could not reveal his sources "to protect them".
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One of the journalist's lawyers, Avigdor Feldman, asked Netanyahu why this particular claim had bothered him so much.
"Many things have been written, sometimes much worse, but in those cases you did nothing. Why?" he asked Netanyahu.
"Because you respect democracy, freedom of expression?" he asked, drawing chuckles from journalists in the audience.
In power for a total of more than 10 years, Netanyahu has had difficult relations with the news media, accusing certain journalists of seeking to force him out of office.
In November, his office issued a statement attacking a well-known Israeli television journalist after an investigative report.
Yediot Aharonot has had particularly tough coverage of Netanyahu.
One particular focus of the Israeli media has been an investigation focusing on expensive gifts, including cigars and champagne, allegedly handed to the Netanyahus.
They have repeatedly denied any wrongdoing.
Regarding the Facebook claim, the premier said that the idea his wife could have had the upper hand over his security detail, leading to such an incident, was "totally false".
Sara Netanyahu, 58, said she has been falsely presented as someone with the "powers of a witch."
"It is inconceivable that the prime minister be kicked out of his convoy or that I kick him out of his convoy," she said.
With a tense smile, she said: "I am here because I am looking for the truth."
"If I had to sue over all the lies against me over the last 20 years, I would have spent all my days in court."
But she called Sarna's claim among the "very bad lies" and proof of how she has been "demonised".
Another hearing is set for May 18.