The Israeli president's office has confirmed that prime minister Benjamin Netanyahu has cancelled early elections.
In a statement, president Shimon Peres' office said that Mr Netanyahu had informed the president that he has reached an agreement with the leading opposition party, Kadima, to form a broad-based coalition government.
That agreement overrides Mr Netanyahu's announcement on Monday that his governing coalition would seek early elections.
The dramatic turn of events could influence any decision on a possible Israeli strike on Iran.
Kadima's leader Shaul Mofaz, a former military chief and defence minister, has been a vocal critic of Israel striking Iran's nuclear sites on its own.