Mr Levy was expected to seek the job of Infrastructure Minister, but instead said he opted for the Finance Ministry. Mr Netanyahu hopes the return of Mr Levy, who has a small faction in parliament, will strengthen his government and allow him to avoid early elections. Mr Levy said last night: "The Prime Minister knows my choice. I informed him of it. I hope it will be settled this evening."
Critics in Mr Netanyahu's Likud and other coalition parties accuse Mr Levy of surrendering West Bank land that they believe is essential to Israeli security.
Mr Levy resigned as foreign minister at the beginning of the year saying that the peace process with the Palestinians was moving too slowly. Since signing the peace accord brokered in Wye, Maryland, Mr Netanyahu has lost support on the far right and needs to buttress his coalition by adding Mr Levy. There is little love lost between the two men, however, and for several years they refused to speak to each other.
An alternative for Mr Netanyahu is to form a national unity government with the Labour party. But he would probably only do this if he had no alternative. Labour would demand a significant share of senior posts in the government as the price of its co-operation.
Although Mr Levy says he wants the Finance Ministry, currently held by Yaacov Neeman who is willing to resign, he might settle for the Infrastructure Ministry. Both have significant political and financial patronage.
Mr Levy, 60, originally achieved prominence in Israeli politics as a representative of Jews from the Middle East, and is a supporter of a generous social welfare programme.
n Mr Netanyahu has accused the Palestinians of breaching their interim peace deal and urged President Bill Clinton to step in and stop them, Israeli officials said.
Mr Netanyahu's spokesman, David Bar-Illan, said the Israeli leader had written to the American president citing "four major areas of violations" of the Wye agreement.
Israeli newspapers quoted sources in Washington as saying the US administration was worried that Mr Netanyahu was seeking excuses to halt implementation of the deal because of his coalition problems. On Monday, Palestinian officials said continued expansion of Jewish settlements on Israeli-occupied land in the West Bank and Gaza would destroy the peace process.
Mr Clinton is due to address the Palestine National Council in Gaza later this month.