The dramatic and unexpected move did not immediately threaten the stability of Prime Minister Benjamin Netanyahu's parliamentary majority. Instead, it appeared to strengthen Netanyahu's hardline coalition by leaving it with a smaller, yet largely like-minded majority.
But by strengthening hardline elements in the government, it left peace prospects even more uncertain.
Barak, a former prime minister and one of the most powerful members of the government, will stay in the ruling coalition with four followers. Labor's eight remaining members, political doves pushing for Israel to get peace talks back on track, are expected to quit a government they criticize as undermining peace efforts.
The departures would leave Netanyahu with 66 seats in the 120-seat parliament, a smaller majority but rid of dissenting voices unhappy with the state of peace talks.
Announcing his decision, Barak said he was tired of the infighting within Labor. He accused his former partners of moving too far to the dovish end of the political spectrum.
"We are embarking on a new path," he told a news conference at Israel's parliament. "We want to wake up without having to compromise, apologize and explain."
"We are forming today a faction, a movement and in the future a party that will be centrist, Zionist and democratic," he said. He did not take any questions. The new party is called Independence.
Labor has been the sole moderate party in Netanyahu's coalition, which is otherwise dominated by religious and nationalist parties that oppose major concessions to the Palestinians.
Barak and Netanyahu have had a mutually beneficial relationship. The men have known each other for decades, back to the time that Barak was Netanyahu's commander in an elite commando unit in the army.
As a former prime minister, Barak has given Netanyahu a well-known and relatively moderate face to deal with the international community, particularly with the United States. Netanyahu, meanwhile, has given Barak extra influence in decision making.
But Labor members have grown increasingly unhappy with Barak, accusing him of enabling Netanyahu to stall in peace efforts. Although Barak is an outspoken advocate of peace with the Palestinians, he also takes a tougher line on security matters than some of his counterparts and has moved slower than they would like on favoring concessions to the Palestinians.
Negotiations with the Palestinians broke down in late September after Netanyahu allowed a freeze on settlement construction to expire.
The Palestinians refuse to negotiate without a total freeze in place, and Netanyahu has refused to extend the moratorium, despite heavy U.S. pressure.
Barak's move took other Labor lawmakers by surprise, and Israeli radio commentators said he orchestrated the move in tandem with Netanyahu. A spokesman for the prime minister, Mark Regev, refused to comment.
Cabinet Minister Avishai Braverman, one of the eight Labor lawmakers who did not join Barak, predicted his faction would quit the government. "It's clear to me that's what will happen," he said.
Einat Wilf, one of Barak's followers, said the party could no longer remain united, with one side pushing to the far left of Israeli politics, while the other believes staying with the government is the right type of partnership.
Barak's decision may have been a pre-emptive move to put down growing unrest in the party.
An increasing number of Labor members had urged Barak to pull out of the government because of the impasse. One member, Daniel Ben-Simon, quit the party last week to protest Barak's decision to remain in the government.
Labor dominated Israeli politics for the country's first three decades, producing a string of prime ministers that included Israel's founding father, David Ben-Gurion, and the slain prime minister, Yitzhak Rabin. Barak himself briefly served as prime minister just over a decade ago.
But in recent years, Labor has been reduced to a midsize party, with just 13 seats in the current parliament. Many party members hold Barak responsible for the party's demise, and accuse him of abandoning its socialist and dovish ideals to remain in power.