With his coalition divided over a flurry of domestic issues, Netanyahu had declared in recent days that he would hold a parliamentary election in September, more than a year ahead of schedule. But as parliament convened late Monday to move toward elections, he and Mofaz were secretly wrapping up their power-sharing deal. Israelis were stunned to wake up Tuesday to a new political reality.
Netanyahu now heads a 94-member coalition, one of the broadest alliances in the 120-seat parliament in Israeli history putting him in a strong position to push forward with new initiatives.
While Netanyahu emerges as a winner in that sense, the outcome is also a life raft for Mofaz. Netanyahu had been widely expected to win the election by securing a majority of seats for his Likud and the religious and nationalist parties that are its natural but pesky allies. The opposition center-left bloc was behind in the polls and appeared headed toward splintering into several medium-sized parties to boot.
For Israelis who felt alienated by the Netanyahu government and they were legion among the country's various elites there is now the prospect of a more moderate leadership no longer dependent on the extreme right.
At the news conference, Netanyahu boasted of bringing "stability" to Israel's volatile political system, where governments rarely serve their full terms. The revamped coalition is expected to sit through the end of the parliamentary term in October 2013.
Together, he and Mofaz pledged an unspecified reform of the political system, to protect the economy and to tackle the contentious issue of draft exemptions granted to ultra-Orthodox men numbering in the tens of thousands. The Supreme Court has ordered an end to the exemptions, and divisions between secular and religious parties over the issue had threatened to tear apart the outgoing coalition.
No longer dependent on the smaller factions, Netanyahu now has far more leeway to tackle these issues, as well as sensitive foreign policy matters such as Mideast peace and the Iranian nuclear program.
Peace talks with the Palestinians have been frozen throughout Netanyahu's three-year term due to disagreements over Jewish settlements in the occupied West Bank and east Jerusalem.
The Palestinians, who claim both areas for a future state, have said they won't return to the negotiating table without a settlement freeze. Netanyahu says talks should resume without any preconditions.
Netanyahu vowed to pursue a "responsible peace process," adding: "We are prepared to engage them at any time, any place."
While Netanyahu showed no sign of bending Tuesday, he has shown tentative signs of change in recent years.
Shortly after taking office, Netanyahu abandoned years of hard-line ideology and endorsed the idea of a Palestinian state alongside Israel.
And last month he adopted a central argument of his opponents in saying peace is essential for Israel because the alternative would be absorbing the millions of Palestinians in the occupied lands and destroying Israel's Jewish character.
The Palestinians have dismissed Netanyahu's comments as rhetoric and remain deeply skeptical. Nabil Abu Rdeneh, a spokesman for Abbas, voiced hope that the new Israeli government will "use the opportunity of the widened coalition to work to achieve peace with the Palestinian people."
The addition of Mofaz, a former military chief of staff and defense minister who also heads the largest party in parliament, could give Netanyahu the necessary cover to offer a new initiative.
Mofaz, who has also warned about the demographic threat faced by Israel, said he has "some ideas" on how to move forward with the Palestinians. Mofaz said he favors an interim agreement on border and security arrangements before resolving other outstanding issues.
"This is the direction that the state of Israel should negotiate with the Palestinians, in order to achieve interim, before permanent, agreement," he said.
Likewise, Mofaz has criticized Netanyahu's approach to Iran.
Israel, like much of the West, believes that Iran is trying to develop a nuclear weapon a charge Iran denies.
Netanyahu considers a nuclear-armed Iran to be a lethal threat to Israel's very existence, and has repeatedly hinted that he is prepared to authorize an attack on Iran's nuclear installations if he believes that international diplomacy and economic sanctions are failing.
Last month, Mofaz criticized Netanyahu's tough rhetoric and said it was actually weakening Israel. He described the Iranian nuclear program as a global threat and said Israel should coordinate any attack with the U.S. Mofaz's influence could reduce the chances of a unilateral Israeli strike, at least in the short term.
Netanyahu said he has consulted with Mofaz on Iran for several years. He said the talks were "very serious" and would continue to be "serious and responsible."
Analysts said the alliance between Mofaz and Netanyahu could form a potent combination on Iran, with Mofaz adding a needed dose of public legitimacy.
Reuven Pedatzur, a commentator on military affairs, said Netanyahu can do "whatever he wants" because there is no real opposition. "He just has to convince Mofaz to agree with him," he said.
Kadima had resisted joining the government when former Foreign Minister Tzipi Livni was at the party's helm, because she did not think Netanyahu was serious about reaching a peace deal with the Palestinians. But that hurdle was cleared when Mofaz ousted Livni in Kadima's leadership vote last month. Netanyahu said talks with Kadima had gone on for several days but was not more specific.
Mofaz told the news conference that it had been a "mistake" to sit in the opposition.
While Netanyahu, who has surged in opinion polls, approached the negotiations from a position of strength, Mofaz is in a struggle for survival.
Surveys have predicted Kadima would drop to about a dozen seats in parliament if elections were held, from its current 28.
The new deal gives Mofaz a year and a half to rehabilitate his party, or possibly merge with Likud. Kadima broke away from Likud in 2005, and many members, including Mofaz, have their political roots in Likud.
Shelly Yachimovich, head of the opposition Labor Party, said she was furious over the last-minute reversal, expressing anger particularly at Mofaz, who was recently quoted as calling Netanyahu a "liar," yet found himself awkwardly sharing the stage with the prime minister on Tuesday as his deputy.
"I feel revulsion, loathing ... and a sensation that a line has been crossed," she said. Yachimovich is likely to emerge as parliament's new opposition leader.
The news also sidelines political newcomer Yair Lapid, a popular former TV anchorman who has been faring well in opinion polls. Lapid must now wait until the next election to enter parliament.