In a speech on Tuesday, Netanyahu said the then grand mufti of Jerusalem, Haj Amin al-Husseini, a Palestinian nationalist, convinced Hitler to carry out the Holocaust.
"Hitler didn’t want to exterminate the Jews at the time. He wanted to expel the Jews," Netanyahu told the World Zionist Congress.
"And Haj Amin al-Husseini went to Hitler and said: 'If you expel them, they'll all come here.' 'So what should I do with them?' he asked. He said: 'Burn them.'"
Israeli opposition politicians as well as Palestinian leaders have sharply criticised Netanyahu's comments, while historians say they are inaccurate.
They came amid three weeks of Palestinian unrest and attacks threatening a full-scale uprising.
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The Israeli premier sought to tie his historical reference to current debates over the Al-Aqsa mosque compound in Jerusalem, arguing that the mufti had also falsely claimed at the time that Jews were seeking to destroy it.
Netanyahu has said in recent in weeks that such Palestinian incitement over the Al-Aqsa compound, which Jews call the Temple Mount, was helping feed the current unrest.
"It is a sad day in history when the leader of the Israeli government hates his neighbour so much so that he is willing to absolve the most notorious war criminal in history, Adolf Hitler, of the murder of six million Jews during the Holocaust," Palestine Liberation Organisation secretary general Saeb Erekat said in a statement.
The leader of the Israeli opposition, Isaac Herzog, said on his Facebook page that "even the son of a historian must be precise when it comes to history," referring to the prime minister's late father, Benzion, who specialised in Jewish history.
The chief historian at Israel's Yad Vashem Holocaust memorial and research centre said Netanyahu's comments were inaccurate.
"Though he had very extreme anti-Jewish positions, it wasn't the mufti who gave Hitler the idea to exterminate the Jews," Dina Porat told AFP.
"The idea far predates their meeting in November 1941. In a speech to the Reichstag on January 30, 1939, Hitler evoked 'an extermination of the Jewish race'," she said.