The Prime Minister condemned Amihai Eliyahu’s statement, adding it was “not based in reality”.
Eliyahu, of the right-wing Otzma Yehudit party, made the claim in an interview with Kol BaRama radio station.
A minister for Jewish heritage, Eliyahu is not part of the country’s war cabinet but asked about a hypothetical nuclear option, he replied: “That’s one way.”
When it was noted that ravaging Gaza would endanger 240 hostages - among them foreigners - he responded: “In war, you pay a price” while adding that he was praying for their return.
Eliyahu’s inflammatory remarks were immediately denounced by other cabinet members.
He later backtracked by saying that “anyone reasonable would understand that the comment was metaphorical”.
He added: “A strong and disproportionate response to terrorism is definitely required, which will clarify to the Nazis and their supporters that terrorism is not worthwhile.”
Netanyahu’s office said in a statement that Eliyahu had been suspended from cabinet meetings “until further notice”.
Mr Netanyahu posted on X, formally Twitter: “Eliyahu’s statements are not based in reality.
“Israel and the Israel Defence Forces are operating in accordance with the highest standards of international law to avoid harming innocents.
“We will continue to do so until our victory.”
Yoav Gallant, the defence minister, said: “It’s a good thing that people like this are not in charge of Israel’s security.”
Opposition leader Yair Lapid immediately called for Mr Eliyahu’s sacking, saying the comment was a “shocking and crazy statement by an irresponsible minister”.
“Netanyahu must fire him this morning,” he said in a statement posted to X.
A spokesman for Hamas - which launched its murderous assault on Israel on October 7 - said Eliyahu represented the “unprecedented criminal Israeli terrorism (that) constitutes a danger to the entire region and the world”.