Mr Netanyahu won in November 1 elections that were the fifth in two years after previous governments had failed to form lasting coalitions. He has vowed to expand settlements in his new term.
“I hear the constant cries of the opposition about the end of the country and democracy,” Mr Netanyahu said after taking the podium in parliament ahead of the government's formal swearing-in on Thursday afternoon.
“Opposition members: to lose in elections is not the end of democracy, this is the essence of democracy,” he said.
Mr Netanyahu outlined three “national goals” of his government in a speech to parliament, saying his cabinet will focus on confronting Iran's nuclear activities, a national bullet train project and expanding its peace accords with Arab countries.
He took office a day after his conservative Likud party published guidelines for his new government that placed West Bank settlement among the top priorities.
“These guidelines constitute a dangerous escalation and will have repercussions for the region,” said Nabil Abu Rudeineh, spokesman for Palestinian President Mahmoud Abbas.
The Knesset elected Likud member and former justice minister Amir Ohana as Parliamentary Speaker before the new cabinet was officially sworn in.
Mr Ohana has served as public security minister and is an ally of Mr Netanyahu.
Mr Netanyahu and his Cabinet were sworn in after the government received 63 out of 120 votes in parliament.
Mr Netanyahu, who is on trial for corruption charges that he denies, has attempted to downplay the severity of some members of his government, including Security Minister Itamar Ben-Gvir who leads the Otzma Yehudit (Jewish Power) party.
Under new laws passed days ahead of Thursday's swearing in, Mr Ben-Gvir's authority over the police has expanded. It puts him “in charge” of the police force on behalf of the Israeli government, as opposed to the government being in charge of the police.
Both Mr Ben-Gvir and Mr Netanyahu were heckled in the Knesset on Thursday, with some MPs calling them racist. Hours before the session, Israel's Ambassador to France Yael German resigned, saying she could not represent a government “so radically different from everything I believe in”.
Mr Netanyahu's alliance with the Religious Zionism and Jewish Power parties has faced criticism for opposing Palestinian statehood and the rights of Arab minorities in Israel.
In recent interviews, Mr Netanyahu has repeatedly insisted that the parties in his coalition will be taking their cues from him as their leader.
But coalition negotiations indicated this may not be the case, with Mr Netanyahu receiving demands from his allies on settlement expansion and religious law.
“We will establish a stable government for a full term that will take care of all Israel's citizens,” he said on Wednesday.
Only five women will serve as ministers in the new government.
Female ministers from Mr Netanyahu's Likud party will head up the transportation and environmental protection ministries, and the Prime Minister's office.
A woman will also take the helm of the national missions ministry, the newly-renamed settlement ministry. Orit Strock, of the Religious Zionism party, is a leading figure in the Hebron settler community and the founder of a settler group.
Addressing his final Knesset session as prime minister, Yair Lapid said he was handing over the reins “with an unquiet heart”.
“We are transferring a country to you in excellent condition. With a strong economy, with improved security capabilities and powerful deterrence, with some of the best international standing ever. Try not to ruin it, we’ll be back soon.”
He refused to shake Mr Netayanhu's hand as the new government was inaugurated.
Mr Netanyahu is the country's longest serving prime minister, having held office from 2009 until 2021 and for a stint in the 1990s.
Several thousand demonstrators stood outside the Knesset on Thursday, with some saying “we don't want fascists” in parliament. A protest was expected to take place in Tel Aviv later in the day.
Israel's new government has sparked fears of worsening violence in the occupied West Bank, which has seen its bloodiest year since 2005.
Jewish and Arab rights activists have warned the new government will encroach on millions of lives on both sides of the Green Line, with its guidelines threatening not only to prioritise settlements in the occupied West Bank but also to enforce new Orthodox-leaning rules on Israel's non-religious majority.
“We live in a terrifying time, facing realities that we couldn’t have dreamt about in our worst nightmares,” Noa Sattath, the executive director of the Association for Civil Rights in Israel, told Haaretz newspaper on Wednesday.
There are fears conflict could be ignited with neighbouring Jordan, which controls holy sites in occupied East Jerusalem, including the Al Aqsa compound.
King Abdullah II said Jordan was prepared to deal with any change in status of the holy sites, which he called a “red line”.