The government defeated the motion by a 55-50 majority in the 120-member parliament after more than six hours of stormy debate. Two legislators abstained.
"I'm very happy that the no confidence [vote] fell. I told you that the government would hold," Mr Netanyahu said after the vote.
Foreign Minister David Levy was among the 11 coalition members who failed to support the government in the vote. Two of the 11 could not make it to the plenum but the other nine boycotted the vote to protest against Mr Netanyahu's leadership.
Justice Minister Tzachi Hanegbi caused a political storm during the debate by accusing legislator Ehud Barak, leader of the opposition Labour party and former army chief, of abandoning wounded soldiers during a 1992 training accident.
In his next cabinet reshuffle, Mr Netanyahu is expected to appoint Ariel Sharon as Finance Minister, 15 years after an Israeli government commission held him partly responsible for the massacre of some 800 Palestinians at Sabra and Chatila refugee camps in Beirut during the Israeli invasion of Lebanon in 1982.
Mr Sharon, 69, is demanding that he be included in the small inner cabinet, which makes strategic decisions on negotiations with the Palestinians. Mr Sharon told Israel radio: "I stated [to Mr Netanyahu] in a very clear fashion that I have to be on this team."
The promotion of Mr Sharon, who has been Infrastructure Minister, would move the Israeli cabinet even further to the right and is worrying both the Palestinian leadership and the US. As Finance Minister he will be well positioned to channel money to Jewish settlers in the occupied territories.
Another senior member of government condemned for the Sabra and Chatila massacre is Rafael Eitan, the chief of staff during the invasion of Lebanon, who once described the Palestinians as "cockroaches in a bottle", now Agriculture Minister.