- Avigdor Lieberman is part of most right-wing government in Israel history
- Lieberman believes in 2-state solution to conflict based on land swaps
- Will try to bypass Palestinian leaders and reach out to masses, he say
Mr Lieberman however said he had no intention of starting a new war in Gaza, which would be the fourth since 2008.
He urged Palestinians to pressure Hamas, the Islamist movement that runs the Gaza Strip, to "stop your crazy policies".
"As minister of defence, I would like to clarify that we have no intention of starting a new war against our neighbours in the Gaza Strip or the West Bank, Lebanon or Syria," he said in the interview with Jerusalem-based Al-Quds newspaper.
"But in Gaza, like the Iranians, they intend to eliminate the state of Israel... If they impose the next war on Israel, it will be their last. I would like to emphasise again: It will be their last confrontation because we will completely destroy them."
Lieberman is part of what is seen as the most right-wing government in Israeli history, with several prominent members of Prime Minister Benjamin Netanyahu's coalition openly opposing a Palestinian state.
But while known as a security-minded hardliner, Lieberman believes in a two-state solution to the conflict based on land swaps.
He reiterated that position in the interview, saying he sees the main settlement blocks in the occupied West Bank remaining part of Israel under a final peace deal.
Lieberman, who took office in May, also criticised Palestinian president Mahmud Abbas, accusing him of failing to make tough compromises that could lead to peace.
He predicted Abbas would lose if elections were held, with polls showing most Palestinians would like the 81-year-old to resign.
"There are enough sensible people in the (Palestinian Authority) who understand the situation and know if there is a choice to make between Hamas and Israel, they think partnering with Israel will be better for them," he said.
Lieberman has recently spoken of trying to bypass Palestinian leaders and reach out directly to communities, and his interview appeared to be part of that effort.
Al-Quds was heavily criticised on social media by Palestinians who say it should not have agreed to an interview with an Israeli official as it amounted to sanctioning "normalisation" with an occupying power.
Before taking over as defence minister, Lieberman made a series of controversial statements, including one directed at Ismail Haniya, Hamas's leader in the Gaza Strip.
Lieberman said he would give Haniya 48 hours to hand over two detained Israeli civilians and the bodies of soldiers killed in a 2014 war "or you're dead".
He has since backed off such statements and said he is committed to "responsible, reasonable policy".