Gunmen opened fire during an event marking the first night of Hanukkah at Sydney's Bondi Beach, killing at least 11 people in what Australian officials described as a targeted anti-Semitic attack.
One of the suspected gunmen was also killed.
Netanyahu said the shooting was "cold blooded murder".
He added that in August he had told Prime Minister Anthony Albanese in a letter that the Australian government's policies were promoting and encouraging anti-Semitism in Australia.
"I wrote: 'Your call for a Palestinian state pours fuel on the anti-Semitic fire. It rewards Hamas terrorists. It emboldens those who menace Australian Jews and encourages the Jew hatred now stalking your streets'," Netanyahu said in a speech.
Albanese said on August 11 that Australia would recognise a Palestinian state at September's United Nations General Assembly, a move that followed similar announcements by France, the United Kingdom and Canada.
In his speech on Sunday, Netanyahu accused Albanese's government of "doing nothing to stop the spread of anti-Semitism in Australia".
"You let the disease spread and the result is the horrific attacks on Jews we saw today," he added.
Albanese convened a meeting of the country's national security council on Sunday and condemned the attack, saying the evil that was unleashed was "beyond comprehension".
"This is a targeted attack on Jewish Australians on the first day of Hanukkah, which should be a day of joy, a celebration of faith," he said.
