"Herein lies the true root of the conflict - the refusal to recognise the state of Israel within any borders whatsoever, along with the encouragement of the murder of Israelis", Mr Netanyahu said. The father of six was laid to rest today in Havat Gilad.
The incident took place in Havat Gilad, a Jewish settlement near the Palestinian city of Nablus.
The Israeli media quoted Israeli Defense Minister Avigdor Lieberman as saying that he would ask the Israeli government for approval Wednesday for a plan to build 1,285 new settlement units this year in settlements in the West Bank.
Turning Havat Gilad into a settlement would make it easier for the government to transfer funds and improve infrastructure, such as roads, electricity and water for the community. "We bless the heroic Nablus operation which comes as a result of the Zionist occupation's crimes".
Hamas, a Palestinian Islamist group, praised the attack.
Israel disputes that its settlements are illegal and says their future should be determined in peace talks with the Palestinians.
Israelis are calling for revenge after the drive-by slaying of a Jewish settler by a suspected Palestinian gunman in the West Bank. "Hamas praises the killers and PA [Palestinian Authority] laws will provide them financial rewards", Friedman wrote on his Twitter account.
Hundreds of people attended on Wednesday the funeral of last night's terror victim, Rabbi Raziel Shevach.
Meanwhile, Israeli Deputy Foreign Minister, Tzipi Hotovely, responded to Ambassador Friedman's tweet, thanking the United States for standing with Israel and for trying to bring an end to the Palestinian Authority's sponsorship of terrorism.
On Tuesday, the Israeli Ministry of Defence said the Palestinian Authority had paid out 1.2 billion shekels ($350 million) previous year in such payments.
The Palestinians on Wednesday strongly criticized Israel's new plan of constructing settlement units in the West Bank and said the policies of the USA administration in the Middle East have provided cover for Israel.
The PA refers to the Western-backed Palestinian Authority, which governs autonomous zones within the West Bank but has no authority in the 60 per cent of the territory known as Area C, where settlements are located.