Israeli Prime Minister Benjamin Netanyahu and Avigdor Lieberman have signed a coalition agreement paving the way for the ultranationalist politician to become the new defence chief.

With the deal signed on Wednesday, Netanyahu will have the support of 66 parliament members, including those from Lieberman's Yisrael Beiteinu party.

The agreement also widens Netanyahu's current one-seat majority in the 120-member parliament, a goal the Israeli leader has said he has sought since winning a fourth term last year.

"I believe the developments in the region have created new challenges for us all. But I also believe they have created new opportunities for peace, and I intend to seize those opportunities. A broader government, a more stable government, will make it easier to do so," Netanyahu said after the announcement.

The new government, which is largely made up of ultra-nationalist and ultra-religious parties is being described as the most right-wing in Israel's history.

"I think the number one priority for Netanyahu is to stay in government, that's what is motivating him. He has an unstable government. He needs to bring in another political party," Mitchell Barak, Israeli political analyst, told Al Jazeera.

Over three decades, Lieberman has at times been Netanyahu's closest ally and other times a fierce rival.

The party of Lieberman, a former foreign minister, has far-right policies on a variety of topics, most particularly his opposition to peace talks with Palestinians and support for settlers in the occupied territories.

Lieberman is one of Israel's most polarising politicians and has a reputation for making inflammatory statements, including calling for the bombing of Egypt's Aswan Dam, and drowning Palestinian prisoners in the Dead Sea. He has also repeatedly said there will never be a Palestinian state.

READ MORE: Palestinians in Gaza pour scorn on Lieberman threats

With the his appointment, Lieberman is now responsible for Israel's military and intelligence agencies. He will also oversee Israel's occupation of the Palestinian territories and the four million Palestinians living in the area.

The Palestinian president's adviser promptly denounced the appointment, saying Lieberman was a "fascist minister" who will promote settlements.

Lieberman left a political alliance with Netanyahu in 2014, arguing that the prime minister's responses to attacks out of the Gaza Strip were not muscular enough.

According to the deal, the government agreed to allocate about 1.4bn shekels ($363m) to pensions of elderly Israelis, including immigrants from the former Soviet Union, Lieberman's largest support base.

Netanyahu has sought to ease fears over Lieberman's appointment, saying he will continue to seek peace with Palestinians and oversee the defence ministry's policies.

"But given his new defence minister's past comments and hardline positions, few are convinced," said Al Jazeera's Imtiaz Tyab, reporting from West Jerusalem.

The deal closes a tumultuous week in Israeli politics. Moshe Yaalon, the defence minister, suddenly resigned last week after Netanyahu reportedly offered his post to Lieberman.