Netanyahu, the head of the ruling Likud party, and Gantz, the head of Blue and White party, agreed to form the government after failures that caused three early elections in a year.
The deal was signed after reaching understanding over the formation of a parliamentary committee concerned with assigning judges.
Israeli daily newspaper Yedioth Ahronoth stated that the deal was signed to form an “emergency” national unity government.
Both Netanyahu and Gantz will take turns to chair the Cabinet, with Netanyahu leading in the first 18 months.
Israel has been facing a political crisis since April 2019 when elections failed to produce a governing coalition. Three subsequent elections were also inconclusive.
The period given by Israeli President Reuven Rivlin to form a government ended last week, and the task of producing a new candidate for premier passed to the Knesset.
Under the law, a Knesset member has 21 days to form a government with a majority of 61 votes.
If no member achieves the target within the deadline, the 23rd Knesset will be dissolved on May 7, and an unprecedented fourth general election will be called by Aug. 4.
Commenting on the deal, Arab member of the Knesset, Ayman Odeh, criticised in a tweet Gantz’s move calling the new Cabinet a government of “surrender”.
He said the signed agreement is “a slap on the face of the civilian majority that went to polls many times to topple Netanyahu.”
“Gantz was not brave enough to triumph and chose to prepare for annexation, racism and corruption,” Odeh said.
For her part, Aida Toma Suleiman, another Arab member of the Knesset, described the new government in a tweet as “the dangerous right-wing government.”
“Gantz has entered [the political process] to replace Netanyahu, and now he is backing him and his racist and anti-democratic approach,” she added.
She vowed that the joint list of Arab lawmakers will continue to lead the opposition against the new government.