Netanyahu also told the cabinet that the government would move settlers living in the outposts it considers to be illegal under Israeli law.
"We will take care of them," he said. "If possible by dialogue. There is no doubt that we have committed ourselves to deal with them."
Last week an outpost near the town of Ramallah was demolished and Ehud Barak, the defence minister, told reporters that Israel was planning to dismantle 22 others.
"We should deal with the remaining 22 in a responsible and correct way," he said. "First, by talking and, if that doesn't work, then unilaterally."
"What we are interested in seeing is that Israel should implement its obligations under the road map, which includes halting settlement activity and expansion in all its forms"
Mohammed Shatayyeh, Palestinian minister
However, the Peace Now group says that more than 50 outposts have been erected since March 2001 and more than 100 are currently in existence.
All settlements are considered illegal under international law and US and European negotiators see them as a major obstacle to achieving a peace deal with the Palestinians.
"What we are interested in seeing is that Israel should implement its obligations under the road map, which includes halting settlement activity and expansion in all its forms," Mohammed Shatayyeh, the Palestinian public works and housing minister, said on Sunday.
He said that if Israel wanted to show it was serious about peace talks with the Palestinians then it should stop providing utilities, such as water and electricity, to settlements and deny them state funding.
But Mark Regev, an Israeli government spokesman, said the fate of existing settlements should be decided at any such negotiations.
"In the interim period, we have to allow normal life in those communities to continue," he said.
Yesha, the main Israeli setttler organisation, criticised Netanyahu's comments, saying that he "should respect the wishes of voters who voted en masse for parties that are in favour of continuing construction in Judea and Samaria," as Israelis refer to the West Bank.
At Sunday's cabinet meeting, ministers also approved a draft law banning commemoration of the Naqba, or "catastrophe" as it is referred to by Arabs, when hundreds of thousands of Palestinians left their homes during the creation of Israel in 1948.
The draft law is scheduled to be submitted for parliamentary approval next week and will propose punishment of up to three years in prison, an official told the AFP news agency.
The law was brought forward at the instigation of the ultra-nationalist Yisrael Beitenu party of Avigdor Lieberman, the foreign minister.
Yisrael Beitenu, Israel's third biggest party with 15 of the 120 seats in parliament, targeted Israel's Arab minority during this year's election campaign, adopting the slogan "No Citizenship Without Loyalty."
About 1.2 million Palestinians live inside Israel.
They are descended from 160,000 Palestinians who remained on their land after the establishment of Israel in 1948.