The Cabinet easily endorsed dismantling of three isolated Gaza settlements by a vote of 17-5, but Netanyahu's surprise resignation stole the spotlight from the Gaza vote, a formality since the overall pullout plan has been repeatedly approved.
Netanyahu wrote that he resigned because he cannot be part of what he described as a "process that ignores reality and proceeds blindly, creating a base for Islamic terror that will threaten the state."
"I am not prepared to be part of this irresponsible act that threatens the security of the Israel," he wrote.
First to react was Israel's stock market, dropping five percent within an hour after news of Netanyahu's resignation broke. Netanyahu, an ex-premier, guided a pro-business economic policy aimed at cutting unemployment and welfare benefits in tandem.
But Netanyahu's move was more political than economic. It removes him from the government 10 days before soldiers and police are to move into Gaza and haul out protesting settlers, a policy that is unpopular with most of the followers of the Likud party of Sharon and Netanyahu. His exit sets Netanyahu up as a challenger to Sharon after the pullout is completed. The two are longtime rivals.
"It was very dramatic in there," said Cabinet minister Matan Vilnai of the moderate Labor party, describing the moment when Netanyahu placed his letter of resignation in front of Prime Minister Ariel Sharon. Vilnai said Sharon did not visibly react.
Settlers and lawmakers opposed to the pullout called on other Likud ministers to resign. However, Education Minister Limor Livnat, who has grudgingly supported the withdrawal, dismissed that. "If I had wanted to resign, I would have resigned," she told Israel TV's Channel Two.
At the beginning of the Cabinet meeting, Sharon denounced a Jewish extremist's shooting rampage that killed four Israeli Arabs as an act of terrorism, and warned that militants could strike again.
The gunman, a deserter from the army who opposed Israel's planned withdrawal from Gaza next week, killed the Arab passengers on a bus Thursday before being bludgeoned to death by an angry crowd.
Sharon complained of "terrible incitement" by Jewish extremists. "There is a danger that such an incident can occur again," he said of last week's attack.