Labour, with 19 seats in the 120-seat Knesset, is the main partner in Ehud Olmert's 67-member coalition. Its departure could bring down the government.
On Monday, Olmert's shaky six-month-old government was bolstered after he reached an agreement with Avigdor Lieberman, the leader of Yisrael Beitenu party, on joining the coalition.
The agreement is expected to be brought for a cabinet vote on Wednesday and to the full Knesset within a week.
Under the agreement, Lieberman will be appointed minister for strategic affairs - a new portfolio, focusing on relations with Iran. Lieberman draws his support mostly from immigrants from the former Soviet Union.
Most of Lieberman's views - which include the transfer of populations to create homogenenous Jewish and Palestinian states - are anathema to Labour, the main liberal party in Israel since the country's creation in 1948.
Ophir Pines-Paz, the culture minister criticised the agreement and called for Labour to resign from cabinet if it goes through.
He said: "The actual appointment of Lieberman as minister for strategic affairs could constitute a strategic threat to Israel.
"Labour party must not give a hand to this move. I will do everything in order for Labour not to be a member of such a coalition. I will try to convince MPs to oppose the move in parliament.
"There is no common ground for sitting with Lieberman in a coalition. Not in the political-diplomatic, the economic or the governance and democracy fields."
Danny Yatom, a Labour MP and former chief of Israel's Mossad spy agency, also expressed "strong opposition to Lieberman's entry, which will legitimise his extreme views calling for the transfer of Israel's Arabs".
"This is a shallow joke to allow Lieberman to become minister for strategic affairs," he said.
Olmert met with Amir Peretz, the Labour leader, on Tuesday to try to persuade his party to accept Yisrael Beitenu in their ruling coalition, Israeli television reports said.
After their hour-long meeting Peretz did not rule our Labour's continued participation in the coalition, but did not make a firm commitment to stay in the government.
Israeli military radio said that Peretz later held talks with other Labour members.
Olmert is due to meet Peretz again on Wednesday.