Netanyahu has the formal authority to fire any Minister, including Lieberman. However, Lieberman may then pull his party out of the coalition and the government will fall. In other words, Firing Lieberman implies cutting the branch Netanyahu is sitting on. He can do it, but the result will be like firing himself too. Mark, bear in mind that Israel has a different system than the US. The PM is not elected directly, he is just the one who heads a coalition of the "willing". You can complain that Netanyahu did not even upbraid Lieberman, which most probably would not have caused Lieberman to pull out, but the fact that he continues to serve in the government does not by itself prove much.
Remand of Meir Ettinger, Israel's most wanted Jewish terror suspect, extended (Haaretz)
from the article: Fire Lieberman