Israeli Defence Minister Ehud Barak says he is resigning as head of the Labour party to form his own faction.
Mr Barak is heading a breakaway group - Independence - which includes four other Labour MPs, reports say.
Correspondents say the move strengthens Prime Minister Benjamin Netanyahu's right-wing coalition, as it allows Mr Barak's party to remain in government.
Labour is due to vote on whether to quit the coalition over Mr Netanyahu's handling of the Mid-East peace process.
But Mr Barak's surprise move pre-empts that decision, due next month, suggesting he still believes Mr Netanyahu is genuine about seeking peace with the Palestinians, says the BBC's Jon Donnison in Jerusalem.
The fledgling peace talks broke down late last year over Israel's refusal to renew a freeze on Jewish settlement building in the occupied West Bank.
"We have presented a request to the Knesset to recognise us as a new faction that will be called Independence," Mr Barak told a press conference that was carried live on Israeli radio and television.
"[The new party] will be centrist, Zionist and democratic," he said.
There have been tensions within the Labour party - a key member of Israel's ruling coalition - for months. A party official said four Labour parliamentarians would be joining Mr Barak's new faction.
Israeli TV and radio stations said that Agriculture Minister Shalom Simchon and deputy defence minister Matan Vilnai were among those who would join the Independence party.
Israeli army radio said Mr Netanyahu was aware of the initiative, and had pledged to allow the defence minister and the other two senior party members to continue in their ministerial posts.
The Labour movement was central to the creation of Israel in 1948 and had long dominated Israeli politics since then.
However, it placed fourth during the 2009 elections, behind the opposition Kadima party, Mr Netanyahu's Likud and the ultra-nationalist Yisrael Beitenu of Foreign Minister Avigdor Lieberman.
It is currently a key member of the ruling coalition, with 13 MPs prior to Monday's split. Mr Netanyahu's coalition currently has a majority, with 74 seats in the 120-seat Knesset.
Analysts say Labour's eight remaining members, political doves who are in favour of getting peace talks back on track, are likely to quit the government.
Their departures could leave Mr Netanyahu with 66 seats in the 120-seat parliament, a smaller but more stable majority.