The Israeli prime minister, Binyamin Netanyahu, has called off early elections after reaching an agreement to broaden his coalition by including the main opposition party, which would put a more moderate face on his government.

President Shimon Peres's office confirmed media reports earlier on Tuesday that Netanyahu had reached an agreement to bring the centrist Kadima party, parliament's largest, into his governing coalition.

The move could have implications regarding a possible Israeli strike on Iran's nuclear facilities and help Netanyahu fend off challenges over an array of issues from nationalist and religious parties in his governing coalition.

There has been no direct comment from Netanyahu's office on the coalition agreement. The prime minister had set early elections in motion on Sunday morning by declaring his government would seek to hold them on 4 September, more than a year ahead of schedule.

Kadima had resisted joining the government when former foreign minister Tzipi Livni was at the party's helm, because she did not think Netanyahu was serious about reaching a peace deal with the Palestinians. But Livni, who had been chief peace negotiator under the preceding Kadima-led government, recently lost her bid to remain party leader to Shaul Mofaz, a former miltiary chief and defence minister.

Israeli media reports said that Mofaz would become a deputy prime minister in the new unity government. Mofaz, too, has accused Netanyahu of not seeking a peace deal forcefully enough, and has also been a vocal critic of any unilateral Israeli military attack on Iran's nuclear sites. With Kadima in the government, Netanyahu could have broader backing to make concessions to the Palestinians and face added pressure to show restraint on Iran.

Israel, like the west, believes Iran is developing nuclear weapons, a charge Tehran denies. But Israel has repeatedly suggested it might strike Iran if it concludes US-led diplomacy and sanctions have failed.

Netanyahu has hinted at the possibility of an Israeli military strike on Iran's nuclear facilities but has not made an open threat. He has, however, vocally insisted on Israel's sovereign right to act if it feels threatened.

Israel considers Iran a threat to its existence because of its nuclear and missile development programmes, the frequent references to Israel's destruction by Iranian leaders, and Tehran's support of violent anti-Israeli groups in Lebanon and Gaza.

Reports of Netanyahu's agreement to bring Kadima into his government emerged shortly after Israel's parliament held debates long into the night over whether to break up. The vote to disperse had passed the first of a required three readings by a 119-1 majority in the 120-seat chamber.

The agreement stabilises a coalition that had frayed over domestic issues such as drafting the ultra-Orthodox into the military and tearing down illegally built structures in West Bank settlements.

Media reports said Kadima agreed to join Netanyahu's government on condition it supports a proposal about a military deferment for ultra-Orthodox Jews. The issue was one of the main reasons Netanyahu decided to bring forward the election date. The deal stipulates that Mofaz will serve as deputy prime minister and that two other key parties, Yisrael Beitenu and Shas, had agreed to the move, according to reports.

Kadima members will also serve as head of the parliament's powerful security and foreign affairs committee, reports said.

Netanyahu's governing coalition has been dominated by religious and nationalist partners that have failed to seriously engage the Palestinians. The coalition has also been criticised for promoting a series of bills that appeared to stifle dissent by targeting dovish groups critical of government policy.

The agreement leaves Netanyahu well placed to put together a more moderate coalition than the hawkish lineup he now heads, in partnership with centrist parties more open to making concession to the Palestinians.

Parliament speaker Reuven Rivlin, a veteran of Israeli politics, said he had never seen such a last-minute political upheaval. "This is good for Israel because it brings stability," he said on army radio as he left parliament before sunrise.

Israel's Labour party called the move "ridiculous" and said it would remain in opposition.