The move significantly strengthens Avigdor Lieberman, hardline leader of the Yisrael Beiteinu Party, and leaves the rest of the Israeli right in disarray.
It also raises questions for the dovish Labor Party, Olmert's main coalition partner.
The accession of Yisrael Beiteinu could herald the end of any potential peacemaking between Israel and its neighbors, and Labor will have to decide whether it can continue serve in the same government. The fact that Lieberman has been accused of racism with regard to Israeli Arabs compounds Labor's dilemma.
Lieberman wants to focus on the strategic threat posed by Iran as well as on reforming Israel's notoriously unstable form of government. A Yisrael Beiteinu proposal to adopt a full-blown American-style presidential system is unlikely to pass, but Lieberman's drive for reform probably will spur changes aimed at strengthening the larger parties within the current European-style parliamentary system, paving the way for more stable government.
Indeed, the reason Olmert turned to Lieberman was because his coalition, barely six months old, was under pressure over the state budget. To avoid yet another early election, Israel's prime minister needs to pass the budget by the end of each year, but with Labor rebels threatening to vote against it, pundits were predicting elections by spring.
With Lieberman in the coalition and assuming Labor decides to stay, Olmert's budget worries are over. With his own Kadima Party, Labor, Yisrael Beiteinu, the Pensioners Party and the Sephardi Orthodox Shas Party, Olmert's coalition includes nearly two-thirds of the Knesset and is unlikely to face any serious challenge to its parliamentary majority -- unless one or more parties defect.
Olmert describes the new coalition as perfectly balanced, with Yisrael Beiteinu to the right, Labor to the left and Kadima in the center, which is precisely where he wants it to be in terms of electoral appeal.
But whether the left-right balance makes for levelheaded decision-making or instead creates paralysis is one of the perennial conundrums of Israeli politics. In this case, left-wingers fear Lieberman may be able to stymie any peacemaking initiatives and even prevent the evacuation of illegal Jewish outposts in the West Bank, as called for by the "road map" peace plan that remains nominally operative.
Evacuation of outposts could be a first test case. Defense Minister Amir Peretz, the Labor leader, has instructed the army to come up with detailed evacuation plans, and there could be a showdown within the next few weeks.
Lieberman has signed onto the guidelines of Olmert's coalition, which include outpost evacuation and peace moves, but pundits are asking whether being in government will moderate Lieberman or whether Lieberman will radicalize the government.
Left-wingers also are highly critical of Lieberman's appointment as strategic affairs minister, with special responsibility for the Iranian threat. They say Lieberman -- who once spoke of bombing Egypt's Aswan Dam -- is the last person who should be dealing with the nuclear threat posed by Iran.
In an editorial titled "Lieberman is a strategic threat," the left-leaning Ha'aretz wrote that "the choice of the most unrestrained and irresponsible man around for this job constitutes a strategic threat in its own right. Lieberman's lack of restraint and his unbridled tongue, comparable only to those of Iran's president, could be disastrous for the entire region."
Lieberman was born in Moldova in the former Soviet Union in 1958, and immigrated to Israel when he was 20. He came to prominence as Likud leader Benjamin Netanyahu's right-hand man, rebuilding the party from 1993-1996 and helping to mastermind Netanyahu's national election victory in 1996.
Lieberman made his name as a political strongman, earning the sobriquet "director-general of the country" when he ran the Prime Minister's Office under Netanyahu.
After falling out with Netanyahu, Lieberman left the Likud in 1999 to found Yisrael Beiteinu, a mainly Russian immigrant party, winning four seats that year, three in 2001 and 11 in elections last May. Uncompromisingly hawkish, he opposed Prime Minister Ariel Sharon's Gaza withdrawal, once resigning from a Sharon government and once being fired.
That did not stop Sharon from describing Lieberman as one of the best ministers in his administration, and few doubt Lieberman's competence. The problem left-wingers have is with his hawkishness on regional affairs, and his perceived racism with regard to Israeli Arabs.
Lieberman caused a furor in the Knesset last May when he labeled Arab legislators who expressed sympathy for the terrorist group Hamas and refused to honor Israel's Independence Day "collaborators."
"The Second World War ended with the Nuremberg trials and the execution of the Nazi leadership. Not only them, but all those who collaborated with them. I hope that will be the fate of the collaborators in this house," Lieberman declared from the Knesset podium.
Arab Knesset members were outraged. Legislator Ahmed Tibi retorted that Lieberman was "a man for whom fascism has become a way of life and racism a tool of the trade."
The Yisrael Beiteinu leader also has two controversial proposals with regard to Israeli Arabs: He wants to pass an amendment to the citizenship law that would require them to swear an oath of loyalty to the state, and favors a land swap with the Palestinians that could leave more than 250,000 Israeli Arabs on the Palestinian side of the border.
Such views are enough for some Laborites to rule out any possible coalition with Lieberman, but others say that whether Labor remains in the coalition depends on the government's policies and actions. Labor's Central Committee is set to meet Sunday to decide. Most pundits believe the decision will be to stay, at least for the time being.
Ironically, Lieberman's move fragments the right at a time when opinion polls show the Israeli public shifting rightward after the Lebanon war. The big loser is Netanyahu -- who, before Lieberman's move, seemed poised to return to power in early elections next year.
Now, if the new coalition holds, elections are due only in 2010 -- by which time the polls likely will be giving very different answers to very different questions.
Leslie Susser is the diplomatic correspondent for the Jerusalem Report