Right-wing nationalist Naftali Bennett has been sworn in as prime minister, leading a “government of change”.
He will lead an unprecedented coalition of parties which was approved with a razor-thin majority of 60-59.
Mr Bennett will be prime minister until September 2023 as part of a power-sharing deal.
He will then hand power over to Yair Lapid, leader of the centrist Yesh Atid, for a further two years.
Mr Netanyahu – Israel’s longest-serving leader who has dominated its political landscape for years – will remain head of the right-wing Likud party and become leader of the opposition.
During the debate in the Knesset (parliament), a defiant Mr Netanyahu promised: “We’ll be back.”
After the vote, Mr Netanyahu walked over to Mr Bennett and shook his hand.
However, representatives of the Palestinians have reacted dismissively to Israel’s new government.
“This is an internal Israeli affair. Our position has always been clear, what we want is a Palestinian state on the 1967 borders with Jerusalem as its capital,” a spokesman for Palestinian President Mahmoud Abbas said.
“It is an occupation and a colonial entity, which we should resist by force to get our rights back,” said a spokesman for Hamas, the Islamist group that controls Gaza.
US President Joe Biden has already sent his congratulations to Mr Bennett, saying he looks forward to working with him.
Why has this happened?
Mr Netanyahu served five terms, first from 1996 to 1999, then continuously from 2009 to 2021.
He called an election in April 2019 but failed to win enough support to form a new coalition government. Two more inconclusive elections followed.
After the third, he formed a government of national unity with then-opposition leader Benny Gantz, but the deal collapsed and Israel went back to the polls in March.
Likud emerged as the largest party, but after Mr Netanyahu was again unable to form a government, the task passed to Mr Lapid, whose party came second.
Opposition to Mr Netanyahu staying in power had grown, not just among the left and centre but also among right-wing parties that are ordinarily ideologically aligned to Likud, including Yamina.
Although Yamina came joint fifth in the election with only seven seats, its support was critical. After weeks of negotiations, Mr Lapid brought Yamina on board as part of a constellation of parties whose only common goal was to remove Mr Netanyahu from office.
The agreement involving eight factions with the 61 seats required for a majority was signed on 2 June, just half an hour before a deadline was due to expire, effectively sealing Mr Netanyahu’s fate.
What will the new government be like?
In appearance, Mr Bennett’s government will be unlike any which has preceded it in Israel’s 73-year history.
The alliance contains parties which have vast ideological differences, and perhaps most significantly includes the first independent Arab party to be part of a potential ruling coalition, Raam. It is also expected to have a record number of eight female ministers.
The inclusion of Raam and left-wing non-Arab Israeli parties means there could be friction on issues such as Israeli policies towards Palestinians – Yamina and another right-wing party, New Hope, are staunch supporters of Jewish settlement in the Israeli-occupied West Bank, for instance.
There could also be difficulties over social policies – while some parties want to advance gay rights, such as recognising same-sex marriages, Raam, an Islamist party, is against this.
In addition, some parties want to relax religious restrictions more extensively than Yamina – a national-religious party – will likely allow.
Mr Bennett has indicated his government would focus on areas where agreement was possible, like economic issues or the coronavirus pandemic, while avoiding more contentious matters.
“Nobody will have to give up their ideology,” he recently said, “but all will have to postpone the realisation of some of their dreams… We’ll focus on what can be achieved, rather than arguing about what cannot.”