Nearly all opinion polls had predicted that Peretz' rival, the veteran and elderly Israeli politician and statesman Shimon Peres, would score an easy win over him.
Peretz won 42.35% of votes cast by Labour Party registered members while Peres obtained nearly 40%.
Benyamin Ben Elizer, a former defence minister and a long-time labour politician, received 17% of the total votes.
The Peretz' victory seems to have enhanced the image of the Labour Party, at least for the time being.
According to an opinion poll published on Friday, a majority of Israelis believe the Labour party now has better chances of regaining power in Israel.
The poll showed that if national elections were to be held now, the party would win 28 seats, seven seats more than its current 21 seats.
Aljazeera.net's Khalid Amayreh spoke to veteran Israeli journalist and commentator Uri Avnery on the significance of Peretz' victory and the immediate and long-range implications of this development on Israeli politics and peace efforts with the Palestinians.
Aljazeera.net: Were you surprised by Amir Peretz' victory and Shimon Peres' defeat in the Labour Party elections?
Avnery: It is certainly a surprise. All opinion polls gave Peres a comfortable lead over Peretz. I myself didn't predict a Peretz' victory.
But this is a pleasant surprise.
Why is Peretz' victory significant in your opinion?
It is very significant; it could have profound and far-reaching ramifications on politics in Israel and the prospects of pace with the Palestinians.
We can compare the ascendancy of a Jew originating in North Africa to the helm of the Labour Party to the Likud's victory in 1977 under the leadership of Menachem Begin thanks to the overwhelming support of Jews who had immigrated from Arab and Islamic countries.
That was a watershed moment in Israel politics. Peretz' win could be a new watershed.
Who elected Peretz?
Peretz was elected by towns and villages inhabited mainly by immigrants from North Africa, the same people who are rioting now in France.
And I would say that they elected Peretz very much for the same reason that North African Muslim immigrants are rioting in France, namely social alienation and economic deprivation.
Why do you think Labour members shunned Peres?
The Labour Party had already become the party of the rich Ashkenazi elite and was distancing itself from the poor and unprivileged people who have a deep sense of being discriminated against by the establishment.
These people had always voted for the Likud and many voted for [the ultra-orthodox] Shas party out of ethnic loyalty. Now that is changing and Jews from Islamic countries are apparently opting to join the Labour Party which may well become the party of Middle Eastern Jews.
Where does Peretz stand on the peace process?
I think Peretz is loyal to the peace process. I think he is more sincere about this than other politicians. [Peretz has already indicated that if elected prime minister, he would ask the Palestinian leadership to enter into negotiations over a final-status settlement.]
Will Peretz enter into a coalition government with Ariel Sharon?
There will be no coalition with Sharon. Sharon is not really interested in reaching a genuine peace agreement with the Palestinians and Peretz is well aware of this fact.
What will Peretz' immediate priorities be?
I think he will try to get rid of the old guards, including such people as [former Israeli Prime Minister Ehud] Barak.
Peretz will very likely sit with Sharon in the next few days in order to designate a date for early elections which I think will take place in the first half of 2006.
Until then, we are going to witness a lot of regrouping in Israeli politics.
Do you think Sharon might opt to form a new coalition with such right-wing parties as the Mifdal (the settlers party), National Union and the secular Shinui (Change)?
I don't think so. First, the settlers and their allies in the Knesset don't have the votes to sustain the government. And, second, Sharon wouldn't want to appear anew as leader of the extremists as this would tarnish his image abroad especially in the United States. So, it seems the only way out of the current deadlock is moving up the general elections.
Has Peres' political life come to an end?
If I were to advise Amir Peretz, I would tell him to give Peres an honorary place in the Labour Party.