Monday's deal gave Clark a third-consecutive term and ended a month of negotiations since the 17 September election in which her Labour Party won 50 seats and the main opposition National party 48 seats in the 121-member parliament.
New Zealand First leader Winston Peters, well known for his anti-migrant and protectionist policies, swung his party's seven votes behind Clark and in return was named as a minister outside the cabinet, meaning he would take on ministerial responsibilities but not participate in cabinet meetings.
Any policies Peters wants implemented will have to be approved by Clark's cabinet.
Peters, a vocal critic of Labour policy in the past, has said the nation's annual ceiling on immigrants should be reduced below 10,000, while Labour has set the figure at 45,000 as it seeks to attract skilled workers.
Peters said a 2004 government campaign to attract more migrants would create "another immigrant invasion" and drag New Zealand "into the status of an Asian colony".
In the September election campaign, Peters said an extremist Muslim "militant underbelly" was being allowed into New Zealand.
Despite his elevation to one of the country's top political posts, Peters appeared grudging in his support for Clark's new administration.
Labour has set the annual ceiling
on immigrants at 45,000
"We have not embraced this government," Peters told TV3's Campbell Live show. "What we have done is ensure there will be a government, there will be stability for three years ... (and) this government will continue till November 2008. That's what the country wanted."
Terence O'Brien, a former diplomat and senior fellow at Victoria University's Centre for Strategic Studies, told New Zealand Press Association that excluding the foreign minister from cabinet would have a disastrous effect on New Zealand's international relations.
"This is not because of who he is, but it's a signal that New Zealand doesn't think foreign affairs has enough status to warrant a seat around the cabinet table," he said.
Clark defended Peters' appointment.
"His views on foreign policy are very similar to those of Labour," Clark said.
"He pointed out he has long been a supporter of New Zealand's nuclear-free status ... he supported the position the government had taken on (opposing sending troops to) Iraq, and on Afghanistan and related issues," she said.
afp/Leader of the .
Peters last held cabinet status as treasurer and deputy prime minister in the 1996 National Party-led coalition government of then prime minister Jim Bolger.
Clark on Monday informed Governor-General Silvia Cartwright the New Zealand representative of Britain's Queen Elizabeth II, she was able to form a government.
Parliament will sit for the first time since the election in the second week of November, Clark said.
Clark said she would fill other cabinet posts within a day - as she became the first Labour chief since World War II to win three consecutive terms as the South Pacific nation's leader.
Clark's Labour Party will rule in a formal coalition with the Progressive Party while nationalist New Zealand First and centre-right United Future parties have formally agreed to support her administration on crucial votes.
"We have not embraced this government"
New Zealand First leader
The Progressive Party has one seat, New Zealand First has seven and United Future has three.
"I have every confidence that this government ... will be durable and will enable us to offer strong, progressive and stable government," Clark said.
New Zealand's opposition National Party significantly boosted its support in the election on pledges to scrap special treatment for the country's impoverished indigenous Maori minority and reduce income tax, but its 48-seat bloc was not enough to topple Clark.