The vote of confidence on Thursday in Olmert's four-party coalition and 25-member cabinet followed four weeks of intense coalition talks.
Olmert's centre-right Kadima party won a March 28 election and now dominates the government.
The cabinet line-up was approved by 65 votes to 49 of those deputies present after a keynote address by Olmert, a speech by Benjamin Netanyahu, the leader of the right-wing opposition, and a debate by MPs.
The coalition includes:
Kadima: led by Olmert, the new prime minister. The centre-right party has 29 seats. It was founded in November by Ariel Sharon, the former prime minister who suffered a serious stroke in January and has been in a coma since. The party is dominated by breakaways from Sharon's former right-wing, nationalist Likud party, along with some from the moderate Labour and academics.
Labour: a centre-left party led by Amir Peretz who is now the new defence minister. Labour, with 19 seats, favours compromise with the Palestinians to reach peace and promotes a socialist-style domestic agenda.
Shas: led by the new industry and trade minister, Eli Yishai, with 12 seats. The ultra-Orthodox Jewish party represents Jews of Middle Eastern and North African origin and is hawkish towards the Palestinians.
Pensioners: led Rafi Eitan, the new pensioners minister. The party was the surprise of the March election. It won seven seats. It wants to gain rights for Israel's elderly.
In a speech before the confidence vote, Olmert said Israel was endangering itself by maintaining isolated settlements in the occupied West Bank.
He said it was thus vital to maintain its Jewish majority by separating from the Palestinians.
Olmert wants to annex the
main West Bank settlements
Olmert said he would prefer to reach a negotiated settlement to the Middle East conflict with the Palestinian Authority but indicated that no progress was possible while the Islamist movement Hamas ran its government.
The incoming prime minister said he was prepared to implement his "convergence" plan unilaterally. About 70,000 settlers would be recalled from the occupied West Bank and "significantly different" borders would be drawn.
Olmert's ultimate goal is to annex the large blocs in the West Bank in which most of the 250,000 Jewish settlers live.
He said: "The continued dispersed settlements throughout Judea and Samaria [West Bank] creates an inseparable mixture of populations which will endanger the existence of the State of Israel.
"This does not mean that the Jewish settlement movement was worthless. the Jewish settlement movement and its main blocs will be forever an inseparable part of the state of Israel, along with Jerusalem, our united capital.
"The borders of Israel, which will be defined in the coming years, will be significantly different from the areas controlled by the State of Israel today.
"Even if the Jewish eye cries and even if our hearts are broken, we must preserve the essence. We must preserve a stable and solid Jewish majority in our state."
"The disengagement from the Gaza Strip and northern Samaria [northern West Bank] was an essential first step in this direction, but the main part is still ahead"
Olmert's plan is a far more ambitious than last year's withdrawal from the Gaza Strip and from isolated settlements in the northern West Bank.
It was the first time Israel left parts of the Palestinian territories it seized in 1967.
Palestinians say that the pullout is not complete, however, since Israel maintains control over the Gaza Strip’s borders, airspace and sea.
In his speech, Olmert was quick to acknowledge that the number set to be uprooted from the West Bank will dwarf the 7,000 settlers who were pulled out of Gaza.
"The disengagement from the Gaza Strip and northern Samaria [northern West Bank] was an essential first step in this direction, but the main part is still ahead," he said.
No member of Olmert's coalition is willing to do business with Hamas, elected by Palestinians in January, which does not recognise Israel and advocates armed resistance.
Olmert, who has previously labelled the Hamas-led government as an enemy entity, said the Palestinian "terrorist infrastructure" had to be dismantled.
"There has never been a government that has given up so much ahead of time and relieves the other side of its obligations"
"A Palestinian government led by terrorist factions will not be a partner for negotiation and we will not have any practical or day-to-day relations," he said.
On the subject of Hamas, the leader of the far-right Yisrael Beitenu party, which is not in the coalition, raised uproar by calling for the execution of Israeli Arab politicians who have been in contact with the Islamists.
"During the Nuremberg trials at the end of World War II, not only the criminals but their accomplices were executed. I hope this will be the fate of the collaborators in this house too," Avigdor Lieberman told parliament.
Netanyahu attacked Olmert's plan, saying unilateral measures would only strengthen hardliners.
"There has never been a government that has given up so much ahead of time and relieves the other side of its obligations," he told the Knesset.
Before swearing in the cabinet, MPs elected Dalia Itzik, a former minister, as the first woman speaker of parliament.