Israel's Labour Party say its members have voted to join a coalition government under Prime Minister-designate Binyamin Netayahu.
Labour leader Ehud Barak had earlier agreed to the deal with Mr Netanyahu, but many Labour members had opposed it.
Under the deal, Mr Barack will reportedly remain defence minister.
In building his coalition, Mr Netanyahu has already negotiated with two right-wing extremist parties.
Israeli radio reports that under the agreement, Mr Netanyahu made a commitment to continue negotiations with the Palestinians and respect past deals signed with them.
Mr Netanyahu, who wants to shift the focus of stalled peace talks from territorial to economic issues, has shied away from declaring support for a two-state solution.
That solution is at the heart of United States efforts to resolve the Israeli-Palestinian conflict.
Meanwhile, Israeli riot police have used tear-gas and water cannons against stone-throwing Israeli Arabs who were protesting against a march by far-right Israeli activists.
About 3,000 police were deployed to keep 100 Israeli marchers apart from Arab-Israeli residents of Umm el Fahm.