The fate of about 37,000 Africans in Israel has posed a moral dilemma for a state founded as a haven for Jews from persecution and a national home.
The right-wing government has been under pressure from its nationalist voter base to expel the migrants. It had been moving ahead with plans to deport many of them to Rwanda when Israel's Supreme Court intervened and froze such deportations in March.
According to the agreement with the U.N. refugee agency that Netanyahu outlined on Monday, about 16,250 African migrants, most of them from Eritrea and Sudan, would have been relocated to Western nations.
"Despite legal restraints and international difficulties that are piling up, we will continue to act with determination to explore all of the options at our disposal to remove the infiltrators," Netanyahu said in the statement on Tuesday.
Netanyahu's backtrack was largely seen in Israel as an attempt to appease his voter base and keep its support at a time of political uncertainty.
The four-term prime minister faces one of the greatest challenges to his career yet — he is under police investigation in three different corruption cases. Netanyahu denies any wrongdoing.
Since 2005, around 64,000 Africans have entered Israel illegally over its border with Egypt, although thousands have since left. A fence Israel has built over the past few years along the frontier has largely stemmed the flow.