Mr Netanyahu showed a drawing illustrating Iran's alleged progress towards nuclear weapons
Iran has warned it is ready to retaliate against attack after Israel's prime minister urged a red line to be drawn to stop its nuclear programme.
Benjamin Netanyahu told the UN time was running out to stop Iran having enough enriched uranium for a nuclear bomb.
In response, Iran's deputy UN ambassador said his country was strong enough to defend itself.
Israel and Western countries suspect Iran is seeking nuclear weapons capability, a charge Iran denies.
Tehran says its nuclear programme is for purely peaceful purposes, such as energy and producing medical isotopes.
Iranian deputy UN ambassador Eshagh al-Habib said his country was: "strong enough to defend itself and reserves its full right to retaliate with full force against any attack".
He accused Mr Netanyahu of making "baseless allegations" in his address to the UN General Assembly in New York.
Mr Netanyahu told delegates at the annual meeting of the assembly that Iran could have enough material to make a nuclear bomb by the middle of next year, and a clear message needed to be sent to stop Tehran in its tracks.
"Red lines don't lead to war, red lines prevent war," he said. "Nothing could imperil the world more than a nuclear-armed Iran."
He said sanctions passed over the past seven years had not affected Tehran's programme. "The hour is very late," he told delegates. "The Iranian nuclear calendar does not take time out."
He said he was convinced that faced with a "clear red line, Iran will back down" and added that he was confident the US and Israel could chart a common path on the issue.
On Tuesday, in his own address to the General Assembly, US President Barack Obama stressed the US would "do what we must" to stop Tehran acquiring nuclear arms.
However, while the Obama administration has not ruled out a military option, it says sanctions and multilateral negotiations with Iran must still be given time to work.
Earlier this month, Secretary of State Hillary Clinton said the US was not prepared to commit to drawing "red lines".
On Wednesday, Iranian President Mahmoud Ahmadinejad accused Western countries of nuclear "intimidation".
"Continued threat by the uncivilised Zionists [Israel] to resort to military action is a clear example of this bitter reality," he told the General Assembly.
'Ethnic cleansing'
Palestinian President Mahmoud Abbas highlighted the Palestinians' UN status, saying he would continue to seek full membership.
But he said negotiations had begun with "regional organisations and member states" aimed at adopting a resolution making Palestine "a non-member state of the United Nations during this session".
"In our endeavour," he added, "we do not seek to delegitimise an existing state - that is Israel - but rather to assert the state that must be realised - that is Palestine."
Currently, the Palestine Liberation Organisation only has "permanent observer" status. Last year, a bid for full-member status failed because of a lack of support at the UN Security Council.
The change would allow Palestinians to participate in General Assembly debates. It would also improve their chances of joining UN agencies and the International Criminal Court.
Last year, Palestinians joined the UN cultural agency Unesco, despite Israeli and US opposition.
Mr Abbas also denounced Israeli construction in and around East Jerusalem. "It is a campaign of ethnic cleansing against the Palestinian people via the demolition of their homes," he said.
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