Defense Minister Moshe Ya'alon announced on Friday morning that he is quitting the government and the Knesset.
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"I notified the prime minister this morning that following his conduct in the latest developments and in view of the lack of trust in him, I am resigning from the government and the Knesset and taking time out from political life," Ya'alon wrote on Facebook.
He added he will deliver a statement to the media at the IDF's headquarters in Tel Aviv later on Friday.
The latest confrontation between Netanyahu and Ya'alon, which took place at the beginning of the week, was over the public backing Ya'alon gave senior IDF officials to express their opinions. His remarks followed Netanyahu's criticism of comments made by IDF Deputy Chief of Staff Yair Golan on Holocaust Remembrance Day.
Following a tense meeting between the two on Monday, Netanyahu and Ya'alon released a joint statement saying that "Prime Minister Netanyahu and Defense Minister Ya'alon met this morning and cleared the air."
"There is no debate on whether the military is subordinate to political leadership and army officers are allowed to freely express their views in the relevant forums."
Ya'alon's resignation leads to the entry to the Knesset of right-wing activist Yehuda Glick, one of the prominent leaders of the battle to allow Jewish worshippers to pray at the Temple Mount. Glick survived an assassination attempt in Jerusalem in 2014.
Netanyahu did not want Glick to become an MK because of his extremist image, and refused to approve the implementation of the so-called "Norwegian Law" in the Likud to block his entry to the legislature.
Speaking to Army Radio on Friday morning, Glick said that "I regret the departure of Ya'alon. He is a moral man and an asset to the people of Israel and the Likud."
The Habayit Hayehudi said in response to Ya'alon's announcement that "Bogie Ya'alon is a man of values who made a conscientious decision that brings back the honor to Israeli politics. We thank him for his contribution to the State of Israel at all the junctions in his life, and are sure that he will return to public activity for the State of Israel."
Netanyahu called Ya'alon late on Thursday, while the Likud's negotiation team was meeting with Yisrael Beiteinu in an effort to finalize the deal. In their talk, Netanyahu relayed a vague message, telling Ya'alon that it was not yet certain that Lieberman would get the defense portfolio and asking him to ignore media reports to the contrary.
Though Ya'alon made no direct comments on the coalition negotiations, he said Thursday that he has been "surprised" of late at a "loss of moral compass on basic questions" in Israeli society. "We need to steer the country in accordance with one's conscience and not whichever way the wind is blowing," said Ya'alon at a seminar of Israel's Youth Movement in Tel Aviv.
Negotiations between the Likud and Yisrael Beiteinu are expected to renew on Friday morning and according to estimates may be completed late in the day.
The two sides agreed on Thursday on the portfolios to be handed out to Yisrael Beiteinu MKs: Alongside Lieberman, who is expected to become appointed as defense minister, MK Sofa Landver will retake the reins at the Immigration Ministry as well as Nativ.
In the Knesset, the party will appoint a deputy speaker and head a committee as well as the immigration cabinet. One of Yisrael Beiteinu's ministers will have a seat at the Ministerial Legislative Committee, at the State Ceremonies and Symbols Committee and at the Social-Economic Cabinet. At the same time, Likud and Yisrael Beiteinu are looking into setting in motion Lieberman's bill for death sentence for terrorists.