Israeli police have questioned Prime Minister Benjamin Netanyahu for nearly three hours on suspicion of graft after the Attorney General said that the police had gathered enough evidence against him as a "possible criminal suspect".

The police investigating team questioned 67-year-old Netanyahu last evening over suspicion that he and his family members received illicit gifts and other favours from businessmen running into hundreds of thousands of dollars.

Netanyahu has strongly denied all allegations against him.

The prime minister also tried to play down the development telling his critics, "don't celebrate yet", hours before he was to be questioned.

"Nothing will come (of this investigation) and you will continue to spew out hot air," Netanyahu had said mockingly.

A statement issued by Attorney General Avichai Mendelblit said that police found enough evidence to support the questioning of the premier as a possible criminal suspect.

The decision to question Netanyahu was made in light of evidence collected in the past month, Mendelblit said.

The new development "changed the evidentiary situation," the Attorney General said adding that it warranted a full-blown investigation, as opposed to a preliminary inquiry, on the prime minister.

The statement chronicled the inquiry but did not provide details as of the nature suspicions in the graft case.

The police has been examining "a long list of claims" against the PM since July, the Attorney General said.

"The inquiry developed and branched out in directions different from the ones that initially launched it," he said.

The statement also detailed suspicions that were raised against Netanyahu but had been since dropped.

Additional information would be released to the public pending the development of the investigation, the AG added.

Israel police has interrogated witnesses abroad as well as in Israel about the graft case against Netanyahu and his family.

One witness whose deposition, as per media reports, led to a breakthrough was Jewish American businessman Ron Lauder, a longtime friend of Netanyahu's.

Lauder confirmed to police that he had given Netanyahu various gifts, including a suit, and that he had also financed a trip abroad for the prime minister's son, Yair.

The police believe the value of the gifts Lauder gave Netanyahu is greater than what he admitted to and that they were not given in friendship, but in hopes of gaining some benefit.