"The moment of truth has come. I cannot sanction a decision which threatens state security," said Sharon's main domestic rival in his resignation letter, excerpts of which were handed to the media.
After handing his letter to the cabinet, Netanyahu walked out of the meeting without giving any explanation.
Netanyahu, a former prime minister and stalwart of Prime Minister Ariel Sharon's Likud party, resigned shortly before a cabinet vote that gave final approval to the removal of a first group of Jewish settlers from the occupied Gaza Strip. The decision passed by 17 votes to five.
The 55-year-old hardline minister is vehemently opposed to the pullout - Israel's first ever from occupied Palestinian land - and had announced he would vote against the evacuation, which is due to kick off on 17 August.
Several other right-wing ministers had already quit Sharon's government coalition over the controversial "disengagement" plan, under which Israel unconditionally relinquishes the whole Gaza Strip and four isolated settlements in the northern West Bank.
Some settlers have vowed they
will not leave without a struggle
According to Yossi Alpher, a well-known Israeli political analyst, Netanyahu's resignation should be viewed as a "last-resort feat aimed at placing Sharon in a position to lose majority in the Knesset".
Alpher told Aljazeera.net that Netanyahu's resignation would prove more dangerous for Sharon's government if some of his erstwhile allies in the cabinet, such as Education Minister Limor Livnat and Minister Dani Navey, followed suit and left the government.
The Palestinian Authority described Netanyahu's resignation as a desperate effort to stop the Israeli withdrawal from Gaza.
"His resignation indicates that the withdrawal will take place on time. It seems that Netanyahu is already behaving as if the withdrawal has already occurred," said PA official Saib Erikat.
The Tel Aviv stock exchange slumped after the announcement of the resignation of the finance minister, who had undertaken a strict programme of liberal policies aimed at reviving an Israeli economy hit by the intifada.
Speaking to Aljazeera, Arab Israeli Knesset member Jamal Zahalqa said: "Netanyahu wanted to retain support by the rightists in the Likud in order to mark the beginning of the struggle against Sharon for winning the premiership and the Likud leadership.
"This is a pre-emptive resignation as Netanyahu was afraid that, after the Gaza evacuation, Sharon would seek to win support from the hardline rightists inside the Likud. He wanted to remodel the opposition inside the Likud and win its support.
"It will make the extreme right-wing more ferocious"
"By so doing, Netanyahu has chosen to adopt political opportunism rather than sticking to principles as he alleges, since he changed his position several times over the evacuation issue."
Asked about adverse effects of the resignation on the evacuation process, he added: "I do not think there will be adverse effects, but it will make the extreme right-wing more ferocious."
Prime Minister Sharon named his closest cabinet ally Deputy Prime Minister Ehud Olmert as caretaker finance minister to replace Netanyahu.
"The prime minister has notified Ehud Olmert of his intention to name him interim finance minister," a statement said.
The deputy premier had previously held the trade and industry portfolio.