The former Texas congressman argued that the U.S. -Israel relationship must "transcend partisanship" and "transcend a prime minister who is racist" in order to maintain the diplomatic alliance between the two countries.
The prime minister replied: "Will we go to the next phase?"
The settlements remain one of the most contentious issues in the region.
Applying sovereignty to Israeli settlements on West Bank land that the Palestinians demand for a future state, presumably along with the roads and infrastructure tethering those places to the rest of Israel, would leave the Palestinians at best with an archipelago of disconnected territory.
Bernie Sanders raised $18.2 million in first quarter
Plus, he did it with more small donors than any other candidate so far, leading the pack among the sought-after demographic. The totals for the first quarter, which ran through to March 31, are the first measure of how candidates are performing.
Senior Palestinian official Saeb Erekat said Netanyahu's statement on annexation was "not surprising".
Peace negotiations between Israel and the Palestinians have been at a standstill since 2014, when a US-brokered attempt to reach a deal collapsed.
"We'll continue to pursue our rights through worldwide forums, including the global criminal court, until we achieve our long overdue justice", he said. "Israel will continue to brazenly violate global law for as long as the worldwide community continues to reward Israel with impunity".
"Why not ask how in 13 years Netanyahu could have annexed and didn't?" said Gantz, in reference to Netanyahu's time as premier. But even if he does, he faces the prospect of becoming the first sitting prime minister to be indicted.
But many liberal American Jews fear Mr. Netanyahu will push Israel's government even further to the right if he wins.
He has a hard-line position on the Palestinians and wants to encourage them to emigrate from the occupied West Bank and Gaza. Gantz, who heads the centrist Blue and White Party, will likely win the support of center-left and left-wing parties, but polls predict he will fall short of a governing majority in parliament.