There were scenes of jubilation for some in Israel, as opponents of Netanyahu celebrated his ousting
Naftali Bennett, a former ally of Mr Netanyahu turned bitter rival, has now been sworn in as prime minister.
He will preside over a diverse and fragile coalition comprised of eight parties with deep ideological differences.
There were scenes of jubilation on Sunday night, as Israelis celebrated the swearing in of the new government in Jerusalem.
Mr Netanyahu, who is on trial for corruption, remains head of the Likud party and will hold the post of opposition leader.
Sunday’s vote, passed by a 60-59 margin, ended a two-year cycle of political paralysis in which the country held four elections.
The eight parties, including a small Arab faction that is making history by sitting in the ruling coalition, are united in their opposition to Netanyahu and new elections.
Beyond that, they agree on little else.
It's thought the new coalition is likely to pursue a modest agenda - seeking to reduce tensions with the Palestinians and maintain good relations with the US.
Mr Netanyahu sat silently during the vote. After it was approved, he stood up to leave the chamber, before turning around and shaking Mr Bennett’s hand.
The country’s deep divisions were on vivid display as Mr Bennett addressed parliament ahead of the vote. He was repeatedly interrupted and loudly heckled by supporters of Mr Netanyahu, several of whom were escorted out of the chamber.
Mr Netanyahu, speaking after him, vowed to return to power. He predicted the incoming government would be weak on Iran and give in to US demands to make concessions to the Palestinians.