A divided Cabinet yesterday approved a highly controversial measure that, for the first time in Israel's 62-year history, requires new non-Jewish citizens to pledge loyalty to it as a "Jewish and democratic state".

The 22-8 vote approving the bill, which was supported by Prime Minister Benjamin Netanyahu, came despite a split within his own ruling Likud party, and a warning yesterday by a leading Labour minister in his coalition that the legislation was a "terrible mistake" which would "incite the Arab minority".

The main practical impact of the measure will be to require a relatively small number of non-Jews seeking naturalisation as Israeli citizens in the future – including Palestinians from the West Bank marrying Arab citizens of Israel – to make the loyalty pledge.

But the much wider symbolic resonance of the measure has been strongly condemned by its critics – including some on Israel's traditional right wing – as carrying a needlessly discriminatory message to the international community and more than a million Arab citizens of Israel.

The legislation was promoted by Avigdor Lieberman, the hard-right Foreign Minister, whose party Yisrael Beiteinu had proposed during last year's election campaign that a similar"loyalty oath" be required of all Arab citizens. In an acknowledgement that the present measure will not go that far, Mr Lieberman said after yesterday's vote: "Clearly this will not be the final word on loyalty and citizenship, but it's an important step."

There has been unconfirmed speculation that Mr Netanyahu's agreement to support the measure was intended to secure Mr Lieberman's support for a possible deal with the US on further limits to settlement expansion, limits in turn needed for negotiations with the Palestinians to resume. Mr Lieberman has repeatedly poured scorn on such negotiations.

But three Cabinet members from Mr Netanyahu's party, Deputy Prime Minister Dan Meridor, Michael Eitan, and Benny Begin (son of the late Israeli prime minister Menachem Begin and seen as a right-winger even in Likud terms), joined their Labour colleagues in voting against the majority decision.

Avishai Braverman, the Labour Minorities Minister, said after the vote: "In the world, the public opinion will go mostly against us, even more; inside, you incite the Arab minority. Why? Because Netanyahu has to appease Lieberman. A terrible mistake." His Labour fellow minister Yitzhak Herzog told the liberal daily Haaretz that support for the legislation showed that "fascism was devouring the fringes of society".

Ehud Barak, the Defence Minister and Labour leader, had angered his party colleagues by saying that he did not object to the proposal in principle, but proposed an amendment saying the loyalty pledge should be "in line with" Israel's 1948 Declaration of Independence.

The Declaration commits Israel to ensuring "complete equality of social and political rights to all its inhabitants irrespective of religion, race or sex".

The Cabinet rejected that amendment yesterday after one of the measure's main architects, Justice Minister Ya'akov Ne'eman, said there would be "legal problems" in incorporating it.

As a result, Mr Barak, who had been earlier accused by Mr Braverman of "abandoning the values of Labour", voted against the main measure.

But Mr Netanyahu said he was recommending to the ministerial committee on legislation – which will consider the bill before it goes to the Knesset – that it should find a way of including the reference to the Declaration before it becomes law.

But Ahmad Tibi, an Arab Knesset member, said the measure was a provocation whose "purpose is to solidify the inferior status of Arabs by law".