The 48-year-old firebrand and leader of the Yisrael Beitenu (Israel is Our Home) party was sworn in parliament after the chamber voted 61 to 38 to approve him joining the governing coalition as the nation's first-ever minister for strategic affairs.
Earlier in the day, cabinet ministers voted 22 to one on welcoming Lieberman into the government, where he will also hold the fourth deputy premier post and will co-ordinate efforts to counter arch-enemy Iran's nuclear programme.
"We are taking an important step to strengthen the government," Prime Minister Ehud Olmert, whose own popularity ratings have slumped in recent months, said after the cabinet vote.
The prime minister reached out to Lieberman to shore up his support base in parliament, with his previously 67-member coalition weakened by this summer's war in Lebanon and a series of damaging scandals.
The addition of Yisrael Beitenu's 11 MPs gives Olmert's coalition 78 seats and a comfortable majority in the 120-member Knesset.
Culture Minister Ophir Pines-Paz from Labour, the only minister to oppose Lieberman's joining, announced his resignation hours after the cabinet vote.
"From the moment the Israeli government decided to join ranks with Avigdor Lieberman and Yisrael Beitenu, which hold a platform with racist appearance... I had no alternative but to stick to my position," he told a news conference.
The arrival of 48-year-old Lieberman in the government marks a turn to the right for a cabinet that took office only in May on a lynchpin of Olmert's centrist Kadima party and its main coalition partner, the centre-left Labour.
In concessions to Labour, the cabinet also voted unanimously to make party MP Ephraim Sneh deputy defence minister, and Labour leader and Defence Minister Amir Peretz head of a special government committee for minorities in Israel.
Olmert later heaped praise on Peretz's "strong resolve" in winning his party's backing for the move late on Sunday after an impassioned debate about Lieberman, whose ideas are anathema to the country's oldest liberal party.
"I'm happy for (Lieberman's) joining and appreciate Labour's position... This was not the most natural step for them," he said.
Although the new coalition will be one of the largest in recent times, rampant political differences, particularly between Labour and Lieberman, could signal stormy times ahead.
Labour minister without portfolio Eitan Cabel told AFP that the coalition did not mean the government will be better able to carry out its policies "because there is no unity among ministers".
Seen by his supporters as a desperately needed strong hand and by his foes as a racist demagogue, Lieberman was previously infrastructure and transport minister in 2001-2002 and 2003-2004, and is today the rising star of the right.
Lieberman has called for the transfer of land and populations to create homogenous Jewish and Palestinian states, and for the execution of Israeli Arab MPs who have had dealings with the ruling Palestinian Hamas movement, which Israel considers a terrorist organisation.
Israeli Arab MP Ahmed Tibi immediately blasted Lieberman's entry into power.
"This is a black day for Israel. Olmert and Peretz are sending a message to the Arab minority that someone who calls for your expulsion is being promoted to a deputy prime minister," he said.
The move also sends a message to the Palestinians and the region that "the government is taking a non co-operative and fascist direction," he told AFP.
Two dozen Arab lawmakers and municipal leaders gathered in front of parliament to protest Lieberman's appointment.
Himself a Jewish settler in the occupied West Bank, Lieberman fiercely opposed last year's withdrawal from the Gaza Strip and the dismantling of around 100 wildcat outposts in the West Bank as repeatedly demanded by the United States.
With Olmert already beset by a series of alleged scams, police said on Monday they would open a "preliminary investigation" into whether Olmert abused his position as finance minister during the privatisation of a bank last year.
The investigation will determine whether there is sufficient proof to open a criminal investigation against Olmert, the justice ministry said.

Copyright AFP (Agence France-Presse), 2006