Israel's Defence Minister and Labour party leader Ehud Barak
Israeli Defence Minister Ehud Barak and four other Labour MPs, including Agriculture Minister Shalom Simchon and deputy defence minister Matan Vilnai, were expected to set up a new party called "Independence," major Israeli TV and radio stations reported.
He was expected to formally announce the move at a press conference at the Knesset, or parliament, later in the morning.
Labour is the third largest party in the ruling coalition of Israeli Prime Minister Benjamin Netanyahu, with 13 seats in the 120-member Knesset.
It was not immediately clear whether the other Labour MPs would remain in the coalition following Barak's departure. There have been sharp divisions within the party in recent months over Labour's role in the largely rightwing coalition which has failed in its efforts to further peace talks with the Palestinains.
Army radio said Netanyahu was aware of the initiative and had pledged to allow Barak and the other two senior party members to continue holding their ministerial posts.
A decision by Labour to quit the coalition would have left Netanyahu with a razor-thin majority of 61 seats.
But the formation of this new party was likely to have little impact, army radio reported, saying that even if the remaining Labour members bolted the coalition, Netanyahu would still retain a "stable majority" of 66 MPs.
Two other Labour ministers, Minorities Minister Avishai Braverman and Social Affairs Minister Yitzhak Herzog, are both intending to resign in the wake of the announcement, the radio said.
During the 2009 elections, Labour, which has long dominated Israeli politics since the founding of the state in 1948, limped home in fourth place, behind the opposition Kadima party, Netanyahu's Likud and the ultra-nationalist Yisrael Beitenu of Foreign Minister Avigdor Lieberman.