Mr Lieberman's departure leaves a vacancy in a key cabinet role and means a general election, which must be held before the end of next year, could be take place much sooner.
As rumours of a possible resignation circulated on Wednesday morning, Likud sources were briefing Israeli journalists that there was no need for early elections.
One source said Mr Netanyahu was considering taking the vacated defence portfolio for himself. He already formally sits in the cabinet as both Prime Minister and Foreign Minister.
There has also been speculation over the future of Education Minister Naftali Bennett, Mr Netanyahu's rival on the right wing, who has been known to covet the defence role.
It was not clear on Wednesday afternoon whether Mr Bennett intended to remain in the government.
If his Jewish Home party also withdraws, the coalition would lose its majority in the Knesset.
