The recommendation that Mr Netanyahu be charged with "fraud and breach of trust" was accompanied by a formal police finding that three of his political associates be indicted for political corruption.
The recommendations come in a 995-page police report, completed after a three-month investigation into the political influence used to get Roni Bar-On, an obscure Jerusalem lawyer, appointed attorney-general for 48 hours in January.
The proposed indictment of Mr Netanyahu will do him lasting political damage, even if the attorney-general Elyakim Rubinstein and the state attorney Edna Arbel decide not to proceed with the case.
At the centre of the scandal is the allegation that Aryeh Deri, a former Interior Minister and the leader of one of the parties in the government coalition, who is on trial for corruption, obtained the appoint- ment of Mr Bar-On in order to obtain a plea bargain.
Police also asked for the prosecution of Tzahi Hanegbi, the Justice Minister and Avigdor Lieberman, director general of the prime minister's office. Even if Mr Hanegbi is not put on trial, it will be difficult for him to remain as Justice Minister.
The final decision over whether Mr Netanyahu and his three associates should be brought to trial will be made by the attorney-general and state attorney in the next few days.
Mr Bar-On, previously the chairman of the right-wing football club, was forced to resign in January after only a few hours in the job following a revolt by the legal establishment. The appointment of such an obscure candidate for such a powerful job fed suspicions that the real motive for his appointment was that the Prime Minister wanted somebody malleable enough to offer Mr Deri a plea bargain.
Some ministers have said the government should fall if allegations about a corrupt deal over Mr Bar-On prove correct.
Nathan Sharansky, minister for trade and industry, said that "if only 10 per cent" of the allegations proved correct the government should go.
If Mr Deri, the leader of the religious party Shas, is indicted, his party is threatening to bring down the government coalition of Mr Netanyahu and force fresh elections. The force of this threat is weakened by a belief that Shas would do badly at the polls because of Mr Deri's legal problems.
The police say that during their investigations they were subjected to political pressure, which they withstood.
Meanwhile, Israel yesterday imposed a total closure on the West Bank, preventing all Palestinian workers from entering Israel or Jewish settlements.
The closure was imposed by the Defence Ministry, which said it had received warnings of impending attacks on Israelis. Because of the length of the green line dividing Israel from the West Bank, efforts to seal it off are almost fruitless, even when large numbers of troops are mobilised.
There were some signs of the diplomatic stalemate ending as Yasser Arafat, the Palestinian leader, met David Levy, the Israeli foreign minister, at a European Union-Mediterranean countries meeting in Malta.
Both sides said progress had been made and the origins of present disputes discussed. Security committees of Palestinians and Israelis are to resume meetings, which had been suspended.
Mr Arafat had previously refused to talk while Israel continues to build a Jewish settlement at Har Homa, known to Palestinians as Jabal Abu Ghneim, on land annexed from the West Bank to Jerusalem after the Israeli victory in the 1967 war.
American mediation is expected to resume following the arrival of Dennis Ross, the US peace co-ordinator, in Israel yesterday.Reuse content