The 120-seat parliament approved his Likud-led coalition of right-wingers, rabbis, settlers and former generals by 62 votes to 50.
However, Mr Netanyahu walked straight into a cabinet crisis when two of his Likud party heavyweights, the former defence minister, Ariel Sharon, and the former foreign minister, David Levy, were absent from the initial cabinet list and boycotted the session of the Knesset.
Mr Netanyahu headed off a last-minute coalition crisis by creating a cabinet post for Mr Sharon, a right-wing former general, and by appointing Mr Levy as Foreign Minister.
Although Mr Sharon boycotted the swearing in session in the Knesset, political commentators expected that he would join the government. Mr Levy returned to the post he held in the last Likud administration.
Once he was denied the defence ministry, Mr Sharon demanded finance, another china shop which Mr Netanyahu was determined to exclude him from. The job went to the former justice minister, Dan Meridor.
But Mr Netanyahu has created the post of National Infrastructure Minister, which is expected to go to Mr Sharon, the architect of Israel's 1982 invasion of Lebanon and the driving force behind settlement in the 1980's and early 1990's.
Mr Sharon's inclusion in the 18-member cabinet would raise Arab hackles and displease Washington, which frowns on Jewish settlements.
Mr Levy earlier threw MPs into disarray when he refused to accept the post of Foreign Minister until the Prime Minister allocated Mr Sharon a senior portfolio.
Mr Sharon's original omission from the top cabinet ranks ("unthinkable", in Mr Levy's words) was clumsy and ungracious as it was the burly old warrior who persuaded Mr Levy and another right-wing maverick, Rafael Eitan, to withdraw from the prime ministerial race, leaving Mr Netanyahu a clear run against the Labour Party's candidate, Shimon Peres. Mr Sharon also brokered the deal that won the Likud candidate the crucial votes of the ultra- Orthodox.
Building a coalition of six right-wing, religious, ethnic and centrist parties has proved a crash course in the realities of Israeli politics for the 46-year-old Mr Netanyahu who had never been more than a deputy minister. The coalition parties, including his own Likud, all have their separate aspirations, interests and constituencies.
Mr Netanyahu chose Yitzhak Mordechai, another former general, as Defence Minister. The stolid and popular Mr Mordechai is a political novice. Unlike Mr Sharon, he can be relied on not to make waves.
In his inaugural speech last night, Mr Netanyahu pledged to continue the search for peace with Israel's neighbours. He appealed to the leaders of Syria, Lebanon and Saudi Arabia to negotiate without conditions. But the new government's manifesto was condemned by the Palestinians and the Syrians. Mahmoud Abbas, the chief Palestinian negotiator in talks on the final status of the West Bank and Gaza, said Mr Netanyahu's positions "contradict the spirit of peace." They were, he said, "uncompromising and stubborn".
The Netanyahu government said it undertook to "negotiate with the Palestinian Authority, with the intent of reaching a permanent arrangement, on the condition that the Palestinians fulfil all their commitments fully." This gives Mr Netanyahu an escape hatch if he does not like the way the negotiations are leading, as neither the Israelis nor the Palestinians have fulfilled all their commitments.
But, Mr Netanyahu rules out a Palestinian state, or a Jordanian-Palestinian federation. He is offering the Palestinians only "an arrangement whereby they will be able to conduct their lives freely within the framework of self-government".
The new government also rejects a "right of return of Arab populations to any part of the Land of Israel west of the Jordan river". This condemnshundreds of thousands of Palestinian refugees outside the West Bank and Gaza to permanent exile. On Jerusalem, Mr Netanyahu asserts that the city will "remain forever under Israel's sovereignty".
The guidelines make no mention of Hebron, the last West Bank town under Israeli occupation, which Israel was supposed to evacuate in March. However, they talk of strengthening and retaining Jewish settlements on the West Bank.
On the Syrian front, the incoming Government says it "views the Golan Heights as essential to the security of the state and its water resources". It adds: "Retaining Israeli sovereignty over the Golan will be the basis for an arrangement with Syria."