His coalition cabinet, the result of weeks of tortuous negotiation, is the largest in Israeli political history - the government's meeting table has had to be extended to accommodate all the members.

The cabinet combines Israel's centre-right, centre-left and far-right parties.

Analysts say Iran's nuclear programme is likely to top its security agenda.

Hard-liner Avigdor Lieberman has also been confirmed as foreign minister and Labour veteran Ehud Barak as minister of defence.

Western states have voiced concern at the coalition's likely stance on a two-state solution with the Palestinians.

Speaking in the Knesset before being sworn in, Mr Netanyahu said these were "not normal times" for Israel but asked the parliament to trust him "at this time of global crisis, the likes of which we have not had in years".

"Israel finds itself facing two enormous challenges: an economic challenge, and a security challenge. These two crises have come at a time of great international change," he said.

In an apparent reference to Israel's neighbour, Iran, Mr Netanyahu said the biggest threat to Israel and the world "comes from the possibility of a radical regime armed with nuclear weapons".

He said it was "shameful" that "calls by Iranian leaders to destroy Israel are greeted with indifference by the world, without being firmly condemned".

'Not encouraging'

Mr Netanyahu also said he would engage in peace negotiations with the Palestinians.

He told the Palestinian leadership: "If you truly want peace, peace can be obtained.

"We do not want to govern another people. We do not want to exercise our power over the Palestinians."

But a spokesman for Palestinian Authority President Mahmoud Abbas told the AFP news agency that Mr Netanyahu's statement was "not encouraging", as it made no reference to the possibility of a future Palestinian state.

Mr Netanyahu has said in the past that he sees no need for the Palestinians to have full separate statehood.

This will be Mr Netanyahu's second time as prime minister - he last held the office in 1999.

The BBC's Paul Wood says that when he occupied the post before, Mr Netanyahu talked tough but signed some important agreements with the Palestinians, including handing over land in the West Bank.

But the inclusion of Labour in the coalition will help the government to appear more moderate and to resist pressure, especially from Washington, to move towards a two-state solution, our correspondent says.

Gaza strike

Earlier on Tuesday, Gazan medical sources said two Palestinians were killed in an Israeli air strike in the Gaza Strip.

The Israeli military said the men had been carrying weapons and were trying to plant an explosive device near the border fence.

One Israeli soldier was lightly injured in an exchange of fire when ground troops crossed the fence shortly after the air strike.

Also on Tuesday, Israeli police said two rockets had been fired into Israel by Palestinian militants in Gaza. No injuries or damage were reported.

Tensions over Gaza, with no agreed ceasefire in place in the wake of Israel's bloody operation in January, are one of the pressing security issues the new government will face.

Mr Netanyahu wants to topple Hamas, the militant group that runs the coastal enclave, so the new government could well lead to more difficult times in Gaza, says our correspondent.

Other issues include concerns over Iran's nuclear programme, and whether to pursue a peace deal with Syria.

'Confetti cabinet'

The formation of the government ends nine months of uncertainty since outgoing Prime Minister Ehud Olmert announced plans to step down in the face of multiple corruption investigations.

In his final speech as prime minister, Mr Olmert said he was proud of his government's many achievements and "not in the least bit resentful" as he left office, reported Israel's Haaretz newspaper.

Mr Olmert also said he was sorry for his government's mistakes, which he said were were "not few", but that his conscience was clear.

"I acted for the nation and the people by the best of my judgment," he said.

Mr Olmert's Kadima party, which backs a two-state solution and is now led by outgoing Foreign Minister Tzipi Livni, won the most seats in February elections.

But right-leaning parties did better overall, so her rival, Mr Netanyahu, was considered more likely to be able to form a coalition and invited by President Shimon Peres to try.

Talks aimed at bringing Kadima into a unity government failed, with Ms Livni saying the parties' platforms were too different.

Sitting in opposition will be new territory for the party, our correspondents note, and Israeli commentators are divided as to whether the party will profit from its distinctiveness or simply implode.