As a result, Israel looks headed for new elections, the fifth in three and a half years, and the threat of widening fissures between the groups that made up the eight-party "change" alliance.
The veteran Netanyahu, some observers predict, will battle for a comeback in part by exploiting divisions between the right-wing Jewish and Arab-Israeli groups that had managed to cooperate for 12 months.
During that time, Prime Minister Naftali Bennett held together the disparate coalition of hawks, centrists, doves and Arab Islamists, united chiefly in their desire to oust Netanyahu after 12 straight years in power.
Bennett, who is now due to hand over the top post to Foreign Minister Yair Lapid, focussed on areas of consensus and sought to avoid the most divisive topics, especially around Israel's occupation of the West Bank.
But it was that flashpoint issue that eventually ended the unlikely coalition which, already weakened by defections, faced a revolt by left-wing and Arab lawmakers.
The bone of contention was a previously obscure law that allows Jewish settlers in the West Bank to live under Israeli jurisdiction while many Palestinians live under the rules of military occupation.
Arab coalition MPs, from the left-wing Meretz and the Islamist Raam party, refused to re-certify the law, which gives settlers equivalent legal standing to people who live inside Israel's internationally recognised borders.
'One Big, Weak Link '
Bennett, a religious nationalist who once led a settler lobby, said allowing the measure to lapse by a June 30 deadline would spell security risks and "constitutional chaos".
He instead chose to end the government, thereby delaying a final vote on the issue until after another election.
Political analyst Dahlia Scheindlin said the coalition's collapse proved, once again, that "no government can afford to put aside the Israeli-Palestinian conflict".
She told AFP that Netanyahu, despite his ideological support for extending Israeli law to West Bank settlers, had told his Likud party to vote against its renewal, in order to deliver a fatal blow to Bennett's government.
"Netanyahu is a very good political strategist," she said.
"I think he knew from day one... that there are many things that the coalition could agree on -- and that there is one big, weak link between those parties that he can (use to) wedge it apart, and that is the occupation."
The end came late on Monday, when Bennett and the centrist Lapid, the coalition's chief architect, announced that all their efforts to salvage the coalition had been "exhausted".
They said they would back a bill to dissolve parliament. Barring any surprises, such as defections to the Netanyahu camp, this would likely trigger an election that could be held on October 25.
In keeping with the power-sharing deal agreed one year ago, Lapid will serve as prime minister of the caretaker government for its remaining months.
A parliamentary committee Tuesday took the first of several required steps, approving a request to expedite proceedings on the dissolution bill which would lead to elections within 90 days, with a preliminary plenum vote to be held Wednesday.
The political turmoil again throws a spotlight on lawmakers from Israel's Arab minority, especially Mansour Abbas, head of the Raam party, which won four seats a year ago.
Abbas said he decided to become the first Arab party leader to support an Israeli government in order to improve living conditions for his constituents, including Bedouin in the southern Negev desert.
Netanyahu, who at one stage had also made overtures to Abbas, on Monday lashed out at Bennett for leading a government that "depended on terrorist supporters" and which had "abandoned the Jewish character of Israel".
"I will not form a coalition with Mansour Abbas," Netanyahu vowed.
Some commentators have seen Abbas's collaboration with the Bennett alliance as a game-changer that creates more space for Arabs in Israeli politics.
But the lessons are not clear, argued former Netanyahu adviser Aviv Bushinsky.
Some voters may say "it was an interesting experiment, with the Arab Israelis in the government, but it cost us too much," Bushinsky told reporters.
Nahum Barnea, a columnist with Yediot Aharonot newspaper, predicted Netanyahu would focus on the issue of Arabs in Israeli politics in a campaign sure to be "brutal, malicious and nauseating".
"Likud will say that bringing an Arab party into the coalition was an unforgivable sin, an act of treason against the homeland."