Netanyahu stressed that Israel expects the Palestinian leadership to desist from campaigns against Israel, such as its efforts to block the Jewish state from joining the Organisation for Economic Cooperation and Development (OECD).
Israeli media had reported that Netanyahu would offer a package of goodwill gestures to encourage the Palestinians to proceed to direct talks, which they have refused in the absence of a total freeze on Israeli settlement building.
The gestures are said to include the release of prisoners, the lifting of more roadblocks in the occupied West Bank and the expansion of those parts of the territory under limited Palestinian self-rule.
Israeli media have also said Israel plans to free up land currently allocated to settlements for a road linking a large-scale planned Palestinian community to the West Bank political capital of Ramallah.
Mitchell and Netanyahu also discussed the issue of water in the West Bank, a key element in Middle East peace talks, the premier's office said.
The US envoy met Palestinian leader Mahmud Abbas on Wednesday and was given letters protesting against the killing of a Palestinian teenager in the West Bank, allegedly by an Israeli settler, and the killing of an elderly farmer in Gaza by the Israeli military near the heavily guarded border.
The letters also addressed "the numerous Israeli provocative statements of the last few days," Palestinian chief negotiator Saeb Erakat said, referring to statements by Netanyahu and other officials that settlement construction would continue in annexed Arab east Jerusalem.
Mitchell plans to shuttle between Washington, Jerusalem and Ramallah as part of the indirect peace talks launched on May 9.
The negotiations were first agreed to in March but the initiative collapsed within days when Israel announced plans to build 1,600 settler homes in east Jerusalem during a visit by US Vice President Joe Biden.
The Palestinians eventually agreed to enter the talks after receiving US assurances that the project would be frozen.
Israel, which captured east Jerusalem in 1967 and later annexed it in a move not recognised by the international community, considers the Holy City to be its "eternal and indivisible" capital. The Palestinians see east Jerusalem as the capital of their promised state.
There have been no major announcements of new settlements since March, but Israeli officials have adamantly denied any freeze in east Jerusalem.
"I hope that nobody's actually hinting that a freeze will happen," Jerusalem Mayor Nir Barkat told reporters and diplomats on Thursday.
He added that both Jewish and Arab neighbourhoods in east Jerusalem would be expanded under a masterplan that has been 10years in the making.
The last round of direct negotiations between the two sides collapsed in December 2008 when Israel launched a devastating offensive against the Gaza Strip in a bid to halt Palestinian rocket fire aimed at Israeli towns.
Meanwhile, a Mediterranean Union union planned for Barcelona in June has been postponed to give time for progress in the indirect talks, co-chairman Spain said on Thursday.
"The reason is primarily to allow time to move forward proximity talks," a source at the foreign ministry in Madrid said.
A spokesman for President Hosni Mubarak of Egypt, the other co-chairman, said earlier in Cairo the summit had been postponed until November.
Israel's far-right Foreign Minister Avigdor Lieberman had insisted last week he would go to Barcelona, despite a reported Arab threat to boycott the summit over his attendance.
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