Yaalon said he no longer had any trust in Benjamin Netanyahu after the prime minister offered his post to a hardliner loathed by the Palestinians, in a bid to expand the governing coalition's majority.
The surprise move by the respected former armed forces chief comes after a series of disputes over the military's values and role in society between ministers in Netanyahu's government and top generals backed by Yaalon.
"I told the prime minister this morning that due to his conduct in recent developments, and in light of my lack of trust in him, I am resigning from the government and Knesset (parliament) and taking a break from political life," Yaalon said on Twitter.
That condition looked likely to be met as Netanyahu's right-wing Likud party pressed talks with Yisrael Beitenu on Friday on the terms of a deal to boost the coalition's wafer-thin majority in parliament.
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Yaalon's resignation does not take effect for two days and, hours after it was announced, he used the podium of the defence ministry to deliver an impassioned tirade against the extremism that he said was gripping the Likud party and the country as a whole.
"This isn't the Likud I joined," he added, calling on the "sane majority" of Likud voters as well as the rest of the nation "to realise the severe implications of the extremist takeover of the centre, and fight this phenomenon."
Yaalon said he had worked harmoniously with Netanyahu in the past, but recently "found himself in serious dispute over professional and moral issues with the prime minister, a number of ministers and lawmakers."
Within the government Yaalon had been an outspoken defender of the army's handling of an upsurge of Palestinian violence since last October against criticism from hardline ministers and lawmakers.