The statement on Sunday has increased speculation that Olmert's centrist Kadima party, expected to win elections on 28 March, would team up with centre-left Labour for a coalition robust enough to leave occupied land despite Jewish ultranationalist opposition.
Netanyahu resigned from the cabinet of Ariel Sharon, the prime minister who remains in a coma in hospital, in protest at the withdrawal from the Gaza Strip last year. Netanyahu called the withdrawal a capitulation to Palestinian violence.
Olmert, who assumed prime ministerial powers after Sharon had a stroke on 4 January, has promised similar moves in the West Bank should peace talks remain stalled.
Netanyahu, a former prime minister, told Israel's Maariv newspaper: "Certainly we will not be able to sit in a government predicated along these lines."
Palestinians want all of the West Bank and Gaza, captured by Israel in the 1967 Middle East war, for a state. Many Israelis on the right consider the land a Jewish biblical birthright.
Olmert said in interviews published last week that he planned to impose permanent Israeli borders by 2010 unless Hamas, the resistance and welfare movement that swept Palestinian elections on 25 January, calls a halt to fighting and recognises Israel. Hamas has so far refused to do so.
Even under a peace accord, Olmert has said, Israel will keep large Jewish settlement blocs in the West Bank. Such future annexations have been endorsed by Labour and Likud, but condemned by Palestinians as risking peacemaking efforts. The settlements are illegal under international law.
Citing Israeli government sources, the Haaretz daily newspaper said Olmert briefed the US before going public with his plans. US approval is crucial to any significant Israeli-Palestinian moves.
Yossi Verter, a political commentator, wrote in Haaretz: "Olmert outlined his next coalition: The Netanyahu-led Likud will not be able to be part of it. With such a plan, Olmert's natural partner is Labour."
Buttressed by smaller factions, Verter said, Olmert would be assured of a stable coalition until the next scheduled election in 2010.
Likud is trailing behind Kadima and Labour in opinion polls, but political analysts say its prospects could be boosted by any resurgence of a Palestinian uprising against the occupation that started in 2000.