The agreement comes after Mr Netanyahu's right-wing alliance won a comfortable victory in the country's parliamentary election earlier in November.
The alliance will create the most right-wing government in Israel's history.
"We took a big step [last night] towards a full coalition agreement, toward forming a fully, fully right-wing government," Mr Ben-Gvir said on Friday.
Mr Netanyahu is still continuing talks with three other parties on forming the new government.
Mr Ben-Gvir was convicted in 2007 of racist incitement against Arabs and backing a group considered by Israel and the US to be a terrorist organisation.
He will now have an expanded security portfolio that will include responsibility for Border Police in the occupied West Bank.
The Palestinian Authority's Foreign Affairs Ministry said the deal involving Mr Ben-Gvir would have a "potentially catastrophic impact on the Israeli-Palestinian conflict" and hinder the revival of negotiations between the two sides, which stalled in 2014.
The agreement, which gives Mr Ben-Gvir a position in the Israeli government security cabinet, comes after months of tensions in the West Bank following a deadly army crackdown resulting from a spate of fatal attacks in Israel by Palestinian militants.
It also comes just days after a co-ordinated bombing attack on two bus stops in Jerusalem that killed an Israel-Canadian student and wounded at least 14 others.
In addition to the expanded security portfolio, Mr Ben-Gvir's party will also take ministries in charge of development in the Negev and Galilee regions, the heritage ministry and a deputy position in the economy ministry as well as the chairmanship of the Knesset Public Security Committee.
As a settler living in the West Bank, which Israel occupied in a 1967 Middle East war, Mr Ben-Gvir has long been a fierce opponent of Palestinian statehood. During the election campaign he was seen brandishing a gun at Palestinian demonstrators in occupied East Jerusalem.
He also supports Jewish prayer at the Al Aqsa Mosque complex, a flashpoint site holy to Muslims and Jews.
The site, said to have once housed two ancient Jewish temples, has been the site of repeated clashes between Muslims and Jewish visitors defying rules prohibiting prayer there by non-Muslims.
As his party has moved closer to government, Mr Ben-Gvir has moderated some of his earlier positions and says he no longer advocates expulsion of all Palestinians ― only those he deems traitors or terrorists.
His arrival in government prompted the US State Department to say this month that it expected all officials in the new Israeli administration to share the values of an "open, democratic society, including tolerance and respect for all in civil society".