Israeli Prime Minister Benjamin Netanyahu's Likud party on Friday denied a report he had agreed to call early elections following the resignation of a key partner in his ruling coalition.

A party spokesman said Netanyahu, who was left with a knife-edge majority in parliament after the resignation, held a crunch meeting with Education Minister Naftali Bennett.

"The prime minister told minister Bennett that rumours that a decision has been made to go to elections are not correct," the spokesman said in a statement.

"Prime Minister Netanyahu emphasised the importance of making every effort to preserve the right-wing government".

The statement was issued shortly after a source close to Bennett told AFP the two had agreed that "it would be senseless to continue" with the same coalition.

"They will set a date for elections when they meet with the (other) coalition partners on Sunday," the source said.

Defence Minister Avigdor Lieberman quit Wednesday over a ceasefire deal for Gaza, taking the rest of his hawkish Yisrael Beitenu party with him and leaving the coalition with a single seat majority in parliament.

Bennett, Netanyahu's other main right-wing rival and head of the religious nationalist Jewish Home party, has threatened to quit unless he is given Lieberman's job.