Israel's government declined comment on the announcement by Vice President Omar Suleiman that Mubarak decided to step down after three decades of iron-fisted rule.
The dramatic decision came after an 18-day popular revolt against the 82-year-old autocrat. The uprising was led by young secular Egyptians, with the Muslim Brotherhood, Egypt's largest opposition group, largely remaining in the background.
However, former Israeli officials expressed concern that regime change in Egypt, as part of a wider transformation of the Arab world, could leave Israel even more isolated. Last year, regional powerhouse Turkey shifted away from its alliance with Israel.
"We have a tough period ahead of us," Zvi Mazel, a former Israeli ambassador in Egypt, told Israel TV. "Iran and Turkey will consolidate positions against us. Forget about the former Egypt. Now it's a completely new reality, and it won't be easy."
Some in Israel feared the unrest could spread to neighboring Jordan, the only other Arab country that has a peace deal with Israel, or to the Palestinian territories. Only last month, an uprising in Tunisia ended with the ouster of a longtime dictator there.
Former Israeli Defense Minister Binyamin Ben-Eliezer who was a long-time friend of Mubarak, said he was worried.
"From this day on, I only have lots of questions about what will be, what will be the fate of the peace treaty between us and the Egyptians?" Ben-Eliezer told Israel TV's Channel 10. "There are many questions that we don't have answers for, how will this affect the entire region now?"
Still, the peace treaty with Israel was not raised by protesters during the current uprising, and the Muslim Brotherhood has been vague on the issue.
Israel and Egypt fought four bitter wars before a peace treaty was reached in 1979. Mubarak steadfastly honored the deal after succeeding Anwar Sadat who was assassinated by Egyptian extremists two years after signing it.
Dan Gillerman, a former Israeli envoy at the U.N., said that if radicals prevail in Egypt and elsewhere, it would be devastating for Israel and the region. "At the end of the day what we are seeing in the Middle East is a battle between the moderates and the extremists and I think it is in everybody's interests that the moderates prevail," he told Fox News.
Israel military sources said they were worried that if a peace treaty isn't kept, the military would have to reassess its deployment. They were speaking on condition of anonymity due to the sensitivity of the issue.
A strengthened Muslim Brotherhood could also affect the power struggle between the two Palestinian political camps - the Islamic militant Hamas in Gaza and Palestinian President Mahmoud Abbas in the West Bank.
Abbas is backed by the West, while Hamas draws its support from Iran, Syria and Hezbollah. Hamas is the Gaza branch of the Muslim brotherhood and could gain strength if their Egyptian brethren win a greater say.
In Gaza, thousands rushed into the streets in jubilation. Expectations were rising in Gaza that regime change in Egypt will help end a crushing border blockade of the territory, imposed by Egypt and Israel after a violent Hamas takeover of Gaza in 2007.
"Egypt wrote today a new chapter in the history of the Arab nations and I can see the blockade on Gaza shaking right now," said Gaza's Hamas Prime Minister Ismail Haniyeh.
Hamas has smuggled weapons into Gaza through smuggling tunnels that bypass the blockade, and Israel fears the influx of arms could now increase.
Associated Pres writer Ibrahim Barzak in Gaza City contributed reporting.