Israeli ultra-nationalist Avigdor Lieberman assured Monday he supported the creation of a Palestinian state after being sworn in as defence minister despite outrage over his appointment to the powerful post.

Prime Minister Benjamin Netanyahu's choice of the hardline Lieberman to head the defence ministry has caused alarm among moderates in Israel and has been openly questioned by the United States.

His nomination was approved by the 120-seat Knesset, or parliament, by a vote of 55-43 with one abstention. Twenty-one lawmakers were absent for the ballot.

In a speech after taking office, the 57-year-old former foreign minister and ultra-nationalist who heads the Yisrael Beitenu party sought to calm fears his appointment will add to unrest in the region.

"I listened to everything you [the Prime Minister] said and I absolutely agree with every word, including two states for two peoples," he said.

He also praised Egyptian President Abdel Fattah al-Sisi's recent proposal to revive stalled peace talks between the Israelis and Palestinians, saying it had "created a genuine opportunity".

"We must try to pick up the gauntlet," he said, referring to the Arab Peace Initiative, which he said had "some very, very positive elements".

Netanyahu -- who has been accused of forming the most right-wing government in Israeli history -- was forced to resolve a last-minute dispute with another party in order to bring Yisrael Beitenu into his coalition.

The Knesset vote gives him a 66-seat majority in the assembly.

Speaking alongside Lieberman after the vote, Netanyahu also referred to "positive elements" in the Arab League's peace initiative of 2002, which was relaunched in 2007. The plan offers Israel the recognition of Arab nations if it withdraws from the Palestinian territories.

"We are willing to negotiate with the Arab states revisions to that initiative so that it reflects the dramatic changes in the region since 2002, but maintains the agreed goal of two states for two peoples," Netanyahu said.

- US raises 'legitimate questions' -

Netanyahu's pact with Yisrael Beitenu, which also gave the nationalist party control of the ministry of immigrant absorption, drew criticism both inside Israel and abroad.

Lieberman has pledged harsh measures against Palestinian "terrorists" in the past, and pushed for the expansion of settlements in the West Bank.

He has however promised to act in a "responsible" manner while in office.

The United States said the new coalition raised "legitimate questions" about the commitment of Netanyahu's government to a two-state solution with the Palestinians.

In the wake of the agreement, Environment Minister Avi Gabbay of the centre-right Kulanu party announced his resignation, saying: "I do not think it is right... to form an extremist government."

Lieberman's predecessor Moshe Yaalon, from Netanyahu's Likud party, resigned as defence minister on May 20, warning of a rising tide of extremism in Likud.

Netanyahu's bid to expand his coalition also reopened other fissures in his government, including with the religious nationalist party Jewish Home party.

On Sunday evening, he reached a compromise with Jewish Home leader Naftali Bennett on the latter's demand for the creation of a military liaison position in the government's security cabinet.

Bennett says such a post is needed to avoid security cabinet members being kept in the dark about important developments.

Under the compromise brokered by Health Minister Yaakov Litzman of the United Torah Judaism alliance of ultra-Orthodox parties, security cabinet members will receive frequent personal briefings from the National Security Council as an interim measure.

While some analysts say such a change is needed, Bennett's demand is also seen by some as manoeuvring ahead of the next general election, which is due by 2019 at the latest.

Bennett is widely seen as aspiring to replace Netanyahu.