Members of Israel's centre-right Kadima party decided to leave Prime Minister Benjamin Netanyahu's coalition after the sides failed to agree on a new universal draft law.
A vast majority of the party led by Shaul Mofaz was in favour of leaving the coalition after only joining it in May, reducing the governing coalition by 28 members but still leaving it with a majority.
"Kadima has decided to resign from the national unity government," Mofaz said at Kadima headquarters in Petah Tikva.
"I committed that if we don't succeed in our mission (of bringing a more egalitarian draft law) we won't remain in the coalition," he said. "I'm keeping my word. We are returning, with our heads held high, to serve Israel in the opposition."
Mofaz said he had notified Netanyahu he was resigning as deputy prime minister.
"I regret your decision to pass on the opportunity to make a historic change," Netanyahu wrote to Mofaz following the move.
"After 64 years we were close to a fundamental change in the division of burden," he said in remarks relayed by his office.
Netanyahu said his proposal was "to bring to enlistment of ultra-Orthodox Jews and Arabs from the age of 18. I explained to you the only way to do it was gradually, and without bringing to a tear in the fabric of Israeli society."
Netanyahu and Mofaz were locked in a dispute over the wording of legislation to replace the so-called Tal Law, which allowed ultra-Orthodox Jews to defer military service.
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Kadima had called for universal military or community service, with penalties for those who failed to comply.
But Netanyahu's rightwing Likud party and its ultra-Orthodox coalition partners wanted a more gradual approach and opposed individual sanctions.
Earlier this year, the Supreme Court ruled the law, which is set to expire on August 1, was unconstitutional and needed to be rewritten.
On May 8, Kadima -- the largest party in the Knesset -- joined the coalition in a surprise deal that forestalled plans for a snap election and expanded the coalition to 94 members out of a parliament of 120.
At the time, Mofaz said there was a historic opportunity to create a better, more egalitarian law to enlist Israeli citizens.
He also said this was a chance to change the system of governance in Israel, and committed to doing his utmost to promote talks with Palestinians.
But on Tuesday, Mofaz reportedly rejected a last-minute compromise offered by Netanyahu, and an overwhelming majority of his party voted to leave the government.
Mofaz will regain his position as head of the opposition in two days.
If nothing changes in the immediate future, ultra-Orthodox Jews -- exempted from draft by the Tal Law -- will be obliged to enlist as of August 1, in accordance with the court's ruling.
Defence Minister Ehud Barak issued a statement following Kadima's resignation saying he instructed the army to look at new ways to expand the existing "routes of enlisting the ultra-Orthodox."