Israeli Defence Minister Avigdor Lieberman has resigned over the government's handling of the Gaza crisis, in what could be a fatal blow to Benjamin Netanyahu's fragile coalition.

"You've guessed right. I'm here to resign from the defense ministry," the Yisrael Beiteinu leader told a televised press conference on Wednesday afternoon.

"If I had remained in post, I couldn't have looked in the eyes of our citizens in the south and the family members of the dead IDF soldiers whose bodies are held by Hamas. Any humanitarian improvement in Gaza should have been conditional on their being returned."

The departure of Yisrael Beiteinu members reduces the Israeli governing coalition to 61 seats — a majority of one in the Knesset.

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.