In interviews to US media after the election, Mr Netanyahu attempted to row back, explaining that he was not backtracking from the 2009 Bar Ilan Speech in which he accepted the two-state solution, but was merely saying that in the current regional situation, a Palestinian situation, a Palestinian state was unlikely.
In an interview on Sunday, however, Mr Obama said: "We take him at his word when he said that it wouldn't happen during his prime ministership, and so that's why we've got to evaluate what other options are available to make sure that we don't see a chaotic situation in the region."
The US President also took issue with Mr Netanyahu's election day call for right-wingers to vote in response to "droves of Arabs" voting for the left.
The row escalated further on Tuesday when the White House leaked allegations that Israeli intelligence had spied on the US nuclear talks with Iran, and had then used the information to persuade Congress to undermine the negotiations - an accusation vehemently denied by Israel.
While the implications of the US "re-evaluation" of the peace process are unclear, American officials have indicated that it could mean a withdrawal of their veto on some anti-Israel resolutions at the United Nations, support for the Palestinian demand for a timetable for establishing a state and perhaps also American support for European Union sanctions against the settlements.
Senior Israeli officials complain that while the US-Israel relationship remains ostensibly strong, in recent months it has been more difficult and time-consuming to fix meetings and sign contracts in Washington.
While nothing has yet been formalised, two "confidence-rebuilding" measures are expected in the near future. One is an announcement by Israel that it is releasing tax revenues it charges for the PA. The revenues, now totalling around $500m, were frozen in January in response to the Palestinians' decision to join the ICC.
Another anticipated move is the replacement of Israel's envoy in Washington, Ron Dermer. One of the prime minister's closest advisers, Mr Dermer is seen in the White House as being overly close to the Republican Party and was the man behind Mr Netanyahu's invitation to the speak to Congress.
Israel's current representative to the United Nations and former ambassador to Britain, Ron Prosor, is being mentioned as a replacement for Mr Dermer.
Sources close to Mr Netanyahu insist that the latest tensions with the White House are "artificial and contrived" and were manufactured mainly to try to suppress Israeli opposition to a possible nuclear deal between the international community and Iran, which may be signed in the next few days.
"The Palestinian issue is a sideshow," said an aide close to Mr Netanyahu. "The Americans know as well as we do that there is little hope of going forward now with the diplomatic process - not because of Israel but due to anarchy on the Palestinian side.
"If they don't succeed in signing a deal with the Iranians, this crisis will quickly pass. If a deal is signed, then nothing will help."
