Israeli Prime Minister Benjamin Netanyahu has signed a new coalition deal making controversial far-right politician Avigdor Lieberman Defence Minister while broadening the Government's razor-thin majority in parliament.

Key points: Palestinians are wary of Lieberman's right-wing past

Palestinians are wary of Lieberman's right-wing past Lieberman currently lives in an Israeli settlement in the West Bank

Lieberman currently lives in an Israeli settlement in the West Bank Analysts say Lieberman will have to be more moderate as Defence Minister

At a ceremony in Jerusalem, the hard-line ultranationalist party Yisrael Beiteinu officially joined Mr Netanyahu's coalition, with Mr Lieberman declared as the country's new Defence Minister.

But the appointment is causing deep concern among Palestinians who are wary of Mr Lieberman's past.

The new Defence Minister is one of Israel's most polarising politicians, being famous for making wild threats like bombing Egypt and assassinating Hamas's political leader in Gaza.

His polices on Palestinians have been labelled "racist", with critics saying he has little experience in security affairs, leaving some alarmed that he is now in charge of forces in a country regularly on the brink of conflict.

"He has a history of inciting against Palestinians," Jamal Dajani, spokesperson for the Palestinian Prime Minister's office, said.

"He recently called for the beheading of Palestinians who are not loyal to Israel.

"Palestinians think that someone like him in the position of Minister for Defence is going to create wars and atrocities in the region."

Mr Lieberman, a Russian immigrant, is also a settler, living in one of the Israeli neighbourhoods in the occupied West Bank deemed illegal under international law.

"He has always advocated for land grabs and the expanding of settlements," Mr Dajani said.

"I believe he is going to be on the side of the settlers and that is very disconcerting for Palestinians."

'Netanyahu runs this country, ministers have no power'

But as he spoke next to Prime Minister Netanyahu after the deal was signed, Mr Lieberman was already trying to sound far more conciliatory.

"At the end of the day my intention [is] to provide security, and of course all of us we have a commitment, strong commitment, to the peace, to the final status agreement [with the Palestinians]," he said.

Mr Lieberman even joked about his fiery reputation saying he had undergone surgery to "lengthen his fuse".

Gil Hoffman, the chief political correspondent for the Jerusalem Post, believes Mr Lieberman will be much more pragmatic and level-headed than the public persona gained during his time in the government's opposition.

"Lieberman deserves his reputation for being extreme ... for saying some things that are downright crazy, but go back and look, he said them whenever he was in the opposition," Mr Hoffman said.

"That's the job of an opposition parliament member, to make his voice heard.

"And politically, Lieberman needs to present himself seriously as a candidate for Prime Minister in the future — to do that he has to be more moderate, not more extreme."

Mr Hoffman believes Mr Lieberman won't actually be able to exert as much authority over his new portfolio as he may like.

"Netanyahu runs this country. Netanyahu is in charge. None of the ministers have any power," he said.

With US efforts to broker a two-state solution in tatters, France is hoping to hold an international conference in an attempt to revive peace talks between Israelis and Palestinians the meeting is due to start in Paris on June 3.

The US State Department said the new right-wing Government raised "legitimate questions" about the direction of Israeli policy, but the US would judge based on policies.

"We have also seen reports from Israel describing it as the most right-wing coalition in Israel's history and we also know that many of its ministers have said they oppose a two-state solution," State Department spokesman Mark Toner said.

"This raises legitimate questions about the direction it may be headed in … and what kind of policies it may adopt."

ABC/wires