Lieberman had threatened to quit the coalition as Israeli negotiations with Mahmoud Abbas, the Palestinian president, moved to discussing "core issues" including borders, the fate of Jerusalem and the right of return of Palestinian refugees.
"Negotiations on the basis of land for peace are a mistake ... and will destroy us," Lieberman said.
"If we pull back to the 1967 borders, everyone should ask himself, what will happen the following day.
"Will the conflict stop, will the terror stop? Nothing will change," he said.
Further still, the Israeli Shas Party, with 12 members of parliament, and four cabinet posts, has threatened to leave the governing coalition if Israel agrees to any compromise with the Palestinians over Jerusalem, whose eastern sector Israel captured in the 1967 war.
Domestic troubles have weakened both Olmert and Abbas, but they have publicly pledged to engage in peace talks - which George Bush, the US president, who is mediating the talks, has said are due to be concluded before the end of 2008.
Israeli officials said Olmert was seeking a deal with Abbas that would outline a "framework" for a Palestinian state with implementation delayed until the Palestinians can ensure Israel's security.
Abbas, however, does not wield authority over the Hamas-controlled Gaza Strip, which is a key entity of the occupied Palestinian territories and therefore an issue that will need to be resolved if any peace talks with Israel are to be adequately realised to the benefit of the Palestinian population.
The departure of 11 parliamentarians from Israel's governing coalition weakens Olmert's position ahead of a report, due to be released on January 30, investigating into the Israeli government's political and military conduct during the 2006 34-day July war with Hezbollah.
Olmert may face new calls to resign after the inquiry.