Lieberman's resignation comes amid his rumoured disagreement with Prime Minister Netanyahu over the latter's push for a ceasefire with Hamas that wrapped up almost two days of intense shelling and missile attacks from both sides across the Gaza border.
Defense Minister Avigdor Liberman announces his resignation in a press conference, November 14, 2018.
In Jewish Home, which has eight lawmakers, there were calls for Bennett, now education minister, to succeed Lieberman as defense chief. The departure of Yisrael Beiteinu's five seats in parliament leaves Netanyahu with a majority of just one seat in the 120-seat Knesset.
Netanyahu on Wednesday defended a cease-fire agreement with Palestinian resistance factions in the blockaded Gaza Strip.
"He is now choosing between the end of his career if he stays in his position, and a slight chance of rehabilitating his public image if he resigns", the unnamed minister was quoted as saying.
"I will never vote for Netanyahu". But Housing Minister Yoav Gallant, who was at the meeting, said the ministers all accepted the decision.
Hamas immediately hailed Mr Lieberman's resignation as victory for its fighters.
Schools and businesses in southern Israel reopened on Wednesday after no rocket attacks were reported overnight.
He rushed to defend his decision as criticism mounted and residents in southern Israel protested the ceasefire, with many clamouring for a new offensive in the besieged Strip to stop rocket fire that had been provoked by a botched undercover Israeli operation that left seven Palestinians and an Israeli officer dead.
The Israeli military had no immediate comment, while Hamas also had no immediate reaction. "The cabinet instructed the IDF to continue its strikes as needed".
He described Tuesday's Egyptian-mediated cease-fire deal with the Palestinian group Hamas as "a capitulation to terror".
Israeli officials confirmed Cairo had been involved in Tuesday's arrangement.
Israel maintains a crippling blockade of the Palestinian enclave to isolate Hamas and prevent it from building up its military capabilities.
While Hamas announced a ceasefire Tuesday, the Israelis aren't ready to go that far.
"In a few moments, certain morally bankrupt members of the security council will jump here to blame Israel", Danon said.
Israel and Palestinian militants in Gaza have fought three wars since 2008, and protests and clashes along the Gaza border since March 30 have repeatedly raised fears of a fourth.
Seven Palestinians were killed in Gaza over the course of some 24 hours as Israeli strikes targeted militants and flattened buildings while sending fireballs and plumes of smoke into the sky.
Lieberman's office then made a statement saying that his "alleged support for stopping the attacks in Gaza is fake news". "The defense minister's stand is consistent and has not changed".