The politically charged comments came as Iran held its annual Holocaust denial cartoon contest which Israel says mocks the Nazi genocide of six million Jews during World War Two.
Several cartoons on display poke fun at Mr Netanyahu, with one depicting the Israeli leader as a member of Islamic State (ISIS).
Mr Netanyahu said Iran “denies the Holocaust, mocks the Holocaust, and is preparing another Holocaust” during a weekly cabinet meeting with ministers in Jerusalem.
The Israeli leader added: “I think that every country in the world must stand up and fully condemn this.”
Masuod Shojai, the organiser of the controversial cartoon competition, said the event didn’t deny the Holocaust and wasn’t “ridiculing its victims” but went on to equate Nazi crimes with Israel’s treatment of Palestinians.
Mr Shojai said: “Holocaust means mass killing. We are witnessing the biggest killings by the Zionist regime in Gaza and Palestine.”
The exhibition in Tehran has 150 entries from 50 countries, with many ridiculing Mr Netanyahu and his Middle East policies.
One cartoon shows a map of the Middle East with a coffin bearing the word “Holocaust” flattening Palestinians in place of what should be the country of Israel.
Mr Netanyahu said: “It is not just the policy of subversion and aggression in the region; it is the values on which it is based.
“It denies and belittles the Holocaust and it is also preparing another Holocaust.”
State Department spokesman Mark Toner, who is travelling with Secretary of State John Kerry in Saudi Arabia, said the US was concerned the contest could “be used as a platform for Holocaust denial and revisionism and egregiously anti-Semitic speech, as it has in the past.”