"Once a Palestinian state is established, I can come to the Palestinian citizens, whom we call Israeli Arabs, and say to them 'you are citizens with equal rights, but the national solution for you is elsewhere,'" Livni said during a meeting with high school students in Tel Aviv.
"My solution for maintaining a Jewish and democratic state of Israel is to have two nation-states with certain concessions and with clear red lines," she added.
According to Livni, the national demands of the Israeli Arabs should end the moment a Palestinian state is established.
Last month, Livni said it must be clear to everyone that Israel is a national homeland for the Jewish people, angering Israeli Arab parliamentarians.
Those remarks, however, drew strong criticism from Israel's Arab Culture, Sports and Science Minister Ghaleb Majadele.
"Anyone who raises the idea of transferring the Arab population in Israel to the territories of the state of Palestine is anti- democratic," said Majadele.