The deal, struck in Jerusalem overnight, will form the largest legislative coalition in the country's history, The Jerusalem Post reported Tuesday. It will also hold off early elections, giving the coalition until October 2013 to reach its goals.
"The State of Israel needs stability," Netanyahu said at a news conference. "From the very beginning I wanted to continue to [the original date of the] elections, and when I saw that that stability was being undone I went for [early] elections."
Kadima chair Shaul Mofaz said one of the priorities of the coalition is to replace the Tal Law that allows ultra-Orthodox men to indefinitely defer army service. The unity government will also engage in government reform and advance a "responsible" peace process with the Palestinians, Mofaz said.
Mofaz is expected to be appointed deputy prime minister, Haaretz said.
The surprise deal, praised by the Likud-led governing coalition, was harshly criticized by opposition members, Haaretz said.
President Shimon Peres said "a national unity government is good for the people in Israel."
But Israel Labor Party leader Shelly Yacimovich called it "an alliance of cowards."