After four elections in two years, Bennett's incoming government breaks a long political deadlock and ushers in the most diverse coalition Israel has ever seen, including the first Arab party to serve in the government.
The new cabinet, which will be sworn in after a Knesset confidence vote it is expected to win, was cobbled together by the centrist opposition leader Yair Lapid and ultra-nationalist Naftali Bennett. Serving in his first term as prime minister in the 1990s and since 2009 winning four more terms in succession, he has been a polarising figure, both overseas and at home. Coalition leaders have said it would pass a two-year budget to help stabilise the country's finances and maintain a "status quo" on issues of religion and state.
"Thank you Benjamin Netanyahu for your lengthy and achievement-filled service on behalf of the State of Israel", Bennett said, pledging to be prime minister for "all Israelis".
If Netanyahu loses the premiership, he will not be able to push through parliament changes to basic laws that could give him immunity on charges he faces in his corruption trial.
It spans the political spectrum, with three right-wing, two centrist and two left-wing parties, and even an Arab Islamic conservative party.
Mr. Netanyahu has grown more aligned with Republicans and was embraced by Donald J. Trump, the former president.
The improbable alliance emerged weeks after an 11-day war between Israel and Hamas, the Islamist group that rules the Palestinian enclave of Gaza, and following inter-communal violence in Israeli cities with significant Arab populations.
Their patchwork coalition of parties commands only a razor-thin majority in parliament, 61 of the Knesset's 120 seats, and will still have to contend with Netanyahu - who is sure to be a combative head of the opposition.
He accused Bennett of "fraud" for siding with rivals, and angry rallies by the premier's Likud party supporters resulted in security being bolstered for some lawmakers.
Bennett spoke before Netanyahu, but as he was trying to present his platform, allies of Netanyahu continuously interrupted him with shouts of "liar" and "fraud".
Netanyahu, 71, the most dominant Israeli politician of his generation, had failed to form a government after a March 23 election, the fourth in two years.
Sunday's vote comes at a time of heightened tensions in the Israel-Palestinian conflict, which has grown more bitter in the Netanyahu years, in part due to the expansion of settlements considered illegal under worldwide law in the occupied West Bank.
The "March of the Flags" is now slated for Tuesday, representing a key early test for the new government.
Palestinians were unmoved by the change of administration, predicting that Bennett would pursue the same right-wing agenda as Netanyahu.
"It's still a colonising and occupying power that we must resist".