Ex-military chief Benny Gantz and Yair Lapid, head of the Yesh Atid party, subsequently announced they were joining forces in a bid to oust Netanyahu in the April 9 elections.
Opinion polls suggest their centrist coalition, known as the Blue and White after the colors of the Israeli flag, could triumph over Netanyahu’s Likud at the ballot box. Three major corruption cases further cloud Netanyahu's future.
"For the first time in an election campaign since 2009, it seems that we are entering a truly competitive race for the premiership,” said Yohanan Plesner, a former lawmaker and president of the nonpartisan Israel Democracy Institute. “As a result of this unification there are two legitimate major parties competing for premiership.”
In the face of this potential election threat, Netanyahu reached out to the extreme right of Israeli politics for support, and helped broker a union between the Jewish Power and Jewish Home parties.
The new grouping includes Bezalel Smotrich, who declares himself a "proud homophobe"; Itamar Ben-Gvir, an attorney who defends Israeli settlers implicated in West Bank violence; and Benzi Gopstein, leader of an extremist anti-assimilation group whose Twitter handle means "Kahane was right."
Netanyahu's Likud party said it would reserve the 28th spot on its parliamentary list for the Jewish Home party and grant it two Cabinet ministries in a future government if it merged with the Jewish Power party.
It is this merger that has caused the greatest concern. Jewish Power are political heirs of Kahane's Jewish Defense League — which is considered a terrorist organization by the FBI.
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Kahane himself served a term in the Knesset in the 1980s as head of the Kach party, which pushed for intermarriage between Israeli Jews and Arabs to be banned.
The movement was later banned from Israeli politics as racist. Kahane was assassinated in 1990 in New York by an Egyptian-born American.
In a tweet, the Anti-Defamation League's chief executive, Jonathan Greenblatt, condemned the Jewish Power-Jewish Home linkup.
“There should be no room for racism and no accommodation for intolerance in Israel or any democracy,” he said. “It is troubling that they are being legitimized by this union.”
But will Netanyahu's dealmaking with the far-right be enough to defeat the fledgling Blue and White alliance and allow him to remain in power?
“The Kahanists are a bunch of fascists,” said Yossi Mekelberg, a professor of international relations at Regent’s University London.
Mekelberg, who is also an associate fellow at Chatham House, a think tank in London, said Israeli voters may feel Netanyahu has gone a step too far this time — the key word being “may.”
This is because Netanyahu has successfully found common cause with Israel’s hard right for years.
“Has this Houdini — Netanyahu — run out of tricks, and is this one trick too far?” Mekelberg said. “Rationally thinking, you would argue that the public would see through him.”
The ultimate pragmatist, Netanyahu has stayed in power through an intricate and evolving series of alliances with right wing and religious parties since becoming prime minister in 2009 — his second stint as premier.
He has managed to stay in his job despite serious allegations of wrongfully accepting gifts from wealthy businessmen and dispensing favors to try to win favorable coverage in an Israeli newspaper and a website. Netanyahu denies the allegations.
Netanyahu's campaign speeches are peppered with comments about how Arab parties are disloyal to Israel. Palestinian Israelis make up 20 percent of the population.
On the eve of elections in 2015, he declared that “Arab voters are heading to the polling stations in droves.” According to some experts, this tipped a close election in his favor.
On Thursday, Netanyahu warned that Gantz and Lapid would conspire with Arab parties to stop him from forming a parliamentary majority.
"Tonight the decision is as clear as it ever was: a new left-wing government, weak, led by Lapid and Gantz, with a blocking majority of Arab parties, or a strong right-wing government presided over by me," he said.
Mekelberg said that bringing the far-right closer to the center of power and into the mainstream, as Netanyahu is trying to do, has long-term implications for Israel.
“The meeting between fascism and opportunism is disastrous for any country,” he said. “Can the Israeli people see through it and say, 'We do not want to be associated with it'? I have no evidence of this — let’s wait another week when the campaign is on the way.”
F. Brinley Bruton reported from London, and Paul Goldman from Tel Aviv.
F. Brinley Bruton
F. Brinley Bruton is senior editor in charge of NBC News Digital’s London bureau.
Paul Goldman is a Tel Aviv-based producer and video editor for NBC News.