It is a position that has brought him into direct conflict with the White House, which has repeatedly called for all settlement construction on occupied Arab land to be stopped.
The impasse has seen tensions between the US and Israel rise and there were fears that Netanyahu's comments, coming on the eve of Mitchell's visit, would undermine efforts to reinvigorate the peace process.
Mahmoud Abbas, the Palestinian president, has refused to resume talks with Israel while settlement building continues.
But Mitchell arrived in the region in bullish mood, insisting that peace was achievable.
"Comprehensive peace in this region must not be just a dream," he said. "It must be and it can be a reality. We want to make this reality happen and soon, not in some vague and distant future time."
Mitchell said he would tell Abbas that the US supports his aim of creating a "viable, independent Palestinian state."
"Palestinians are entitled to their freedom and the dignity that comes with the right to determine their own future," he said, before a meeting with the Palestinian leader.
A Palestinian negotiator appeared to play down hopes that talks would resume soon. ""There will be no resumption of (proximity) talks with the Israelis in the coming days," Saeb Erekat said.
Mitchell's meeting with Abbas followed talks with Netanyahu, Ehud Barak, the Israeli defence minister and Shimon Peres, the Israeli president.
During their conversation, Peres told Mitchell that it was "a vital interest" for the Palestinians to have an independent state. "The two of us need it," he said.
Israel's Haaretz newspaper reported on Fridaythat Israeli and US officials were attempting to reach an understanding on a joint approach to the peace process in a bid to defuse recent tensions between the two countries.
It said Netanyahu is considering an interim agreement that would include the establishment of a Palestinian state in the West Bank within temporary borders as a possible way to unfreeze the stalled talks with the Palestinians.
Akiva Eldar, the chief political correspondent of Haaretz in Tel Aviv, said Mitchell's visit indicates that Netanyahu is willing to move forward with proximity talks that will eventually lead to direct negotiations.
"It doesn't mean that Netanyahu will not repeat the usual rhetoric - that 'We have the right to build in East Jerusalem as we have the right to build in Tel Aviv'," he told Al Jazeera.
"He has to pay lip service to his partners in the coalition from his own party Likud and from the extreme right."
Eldar said Netanyahu will also not necessarily agree to the establishment of a Palestinian state within temporary borders any time soon.
"This is a long shot. First, he will try to negotiate the Americans to death on the parameters of the negotiations before we even start the proximity talks.
"The most important thing is, where do we start? The Palestinians and Americans expect the Israelis to start where [former Israeli] Prime Minister Olmert left off in 2008. But Netanyahu says he has no commitment to the offers that were made by his predecessors."
In Washington, the US state department said it decided late on Wednesday to send Mitchell to the region after lower-level officials had meetings with Israeli and Palestinian representatives.
It said the visit is part of efforts to create an atmosphere to move the peace process forward.
"We don't go to meet just to meet. We go there because we have some indication that both sides are willing to engage seriously on the issues," Philip Crowley, a state department spokesman, said.
However, Barack Obama, the US president, recently issued a pessimistic assessmentof the prospects for peace, saying that his country could not force its will on the Israelis and Palestinians if they were not interested in making compromises.
Mitchell has visited the region over a dozen times in the past year, but has been unable to revive the talks, which stalled in December 2008.