Mr Albanese has flagged that Australia will join other Western nations, including the UK, France and Canada, in recognising a state of Palestine at the United Nations General Assembly in September, in response to the worsening humanitarian crisis in Gaza.
A furious Mr Netanyahu unleashed on Mr Albanese during an interview on Australian television on Thursday night.
"I'm sure he has a reputable record as a public servant, but I think his record is forever tarnished by the weakness that he showed in the face of these Hamas terrorist monsters," Mr Netanyahu told Sky News.
"When the worst terrorist organisation on earth... which murdered women, raped them, beheaded men and burnt babies alive in front of their parents and took hundreds of hostages, when these people congratulate the prime minister of Australia, you know something is wrong."
Diplomatic ties hit an all-time low this week after the federal government denied a visa to far-right Israeli politician Simcha Rothman from entering the country for a speaking tour, following provocative comments.
Israel retaliated by cancelling the visas of three Australian diplomats who cover the Palestinian Authority.
"When Prime Minister Albanese and the leaders of France and Britain and others, when they say we'll give them a Palestinian state, they are actually rewarding terror, they are saying it doesn't matter what horrors you people do," Mr Netanyahu said.
"(Australia and Israel) had a great relationship over the years. I think it's gone astray because leaders did not show the strength and conviction they should have, when we're fighting the war of Western civilisation against these barbarians."
Mr Netanyahu's broadside came as the Israeli military maintains pressure on Gaza City with heavy bombardments ahead of an offensive to seize the enclave's largest city.Â
The military has called up 60,000 Israeli reservists.
Mr Netanyahu hinted that the conflict could soon be over.
"We are on the verge of completing this war... when that happens, I think we will have tremendous opportunities to expand the peace," he said.
"We will win."
Earlier this week, Home Affairs Minister Tony Burke said Israel was increasingly isolated on the international stage.
"Strength is not measured by how many people you can blow up or how many children you can leave hungry. Strength is much better measured by exactly what Prime Minister Anthony Albanese has done," he told ABC Radio National on Wednesday.
