In a vote which correspondents described as a formality, ministers voted 22-1 to include Yisrael Beitenu, led by Avigdor Lieberman.
Prime Minister Ehud Olmert had agreed to bring the party into the government to strengthen its position ahead of a series of crucial votes.
On Sunday, Labour backed the plan, but it could still cause deep division.
Correspondents say that despite the Labour Party - the largest party in the governing coalition - voting to support the inclusion of Yisrael Beitenu, the decision could lead to the resignation of some Labour ministers and members of parliament.
One minister, the Labour Party's culture minister Ophir Pines-Paz, dissented.
He has argued that the going into coalition with Yisrael Beitenu would be "violation" of his party's commitment to its electorate because of some of Mr Lieberman's views.
Israeli Arabs have also condemned the plan. Yisrael Beitenu advocates the transfer of some Arab towns out of the state of Israel.
Its leader, Mr Lieberman, has also accused some Israeli Arabs of treason for speaking to the Palestinian militant group, Hamas.
Speaking of the move last week, Azmi Bishara, an Israeli Arab member of the parliament, said: "Israel can't pride itself for being the sole democracy in the Middle East and take in someone so radical [as Mr Lieberman]."
"World governments should boycott the Israeli government over Lieberman as well as its policies against the Palestinians."
For the Israeli government, the inclusion of Yisrael Beitenu in the governing coalition is a significant move to the right less than seven months after the general election seemed to strengthen the centre of Israeli politics.
Correspondents say that Mr Olmert has decided he needs to broaden his coalition and ensure his political survival in the wake of what is widely seen as a debacle in Lebanon.