Benjamin Netanyahu has thanked Malcolm Turnbull for the warm welcome as the first sitting Israeli prime minister to officially visit Australia.
The pair spoke extensively about national security matters, including cyber security, during bilateral talks in Sydney on Wednesday.
"The first thing I should say is G'day mate," Mr Netanyahu told reporters.
Mr Netanyahu invited Mr Turnbull to visit Israel in late October to commemorate 100 years since the Battle of Beersheba.
Australia's 4th Light Horse Brigade were involved in a famous mounted charge.
"You come as a great friend of our people and our civilisation," Mr Netanyahu said.
Mr Netanyahu hit back at calls by former prime ministers Kevin Rudd and Bob Hawke for Labor to recognise a Palestinian state.
"What kind of state will it be that they are advocating? A state that calls for Israel's destruction?
"A state whose territory will be used immediately for radical Islam?"
Mr Turnbull said Australia has always supported a two-state solution, where the Israeli and Palestinian people can live side-by-side.
"It needs to be resolved by direct negotiations between the parties and we certainly encourage that," he said.
"We do not support one-sided resolutions which condemn or criticise Israel."
Mr Netanyahu declined to give detailed comment on reports he is being investigated for allegedly accepting gifts from Australian billionaire James Packer.
"I think nothing will come of it because there is nothing there, except friendship, which is a good thing."
Mr Netanyahu said he did not want to incorporate two million Palestinians as citizens of Israel nor did he want them to be the subject of Israel.
"I want them to have all the freedoms to govern themselves but none of the powers to threaten us," he said.
"Let them govern themselves, but not have the the military and physical power to threaten the state of Israel."
He said the settlements issue was "way overblown".
"The core of the conflict between us and the Palestinians is their persistent refusal to recognise a Jewish state in any boundary," he said.
"And once they recognise a Jewish state, once they recognise the permanence of Israel and the right of Israel to be there as the nation state of the Jewish people, in our ancestral homeland ... everything else will fall in place."
