Israel's Likud Party and Yisrael Beitenu to join forces
Israeli PM Benjamin Netanyahu's party will run alongside that of his ultra-nationalist Foreign Minister, Avigdor Lieberman, in January's election.
Mr Netanyahu said Likud and Yisrael Beitenu's joint list would create a stable government able to deal with the security and economic challenges ahead.
Mr Lieberman said he was confident the alliance could win the election, which has been called nine months early.
Opinion polls put the ring-wing list ahead of leftist and centrist parties.
But a survey published by Channel Two television suggested Likud and Yisrael Beitenu would win more seats in the Knesset as separate entities.
"Unifying lists usually shrinks them," wrote Nahum Barnea in a commentary for the biggest-selling newspaper, Yedioth Ahronoth.
"Anyone who did not tolerate Lieberman and voted for Netanyahu will think twice, and the same is true for those who did not tolerate Netanyahu and voted for Lieberman."
This unexpected announcement transforms Israel's political landscape and marks a big risk by the prime minister, less than three months before a general election.
Benjamin Netanyahu argues that by uniting Likud and Yisrael Beitenu he can build a more solid Knesset coalition which can tackle pressing economic and security issues.
Yet initial polls suggest that this merger may appeal less to voters than if they had remained on separate party lists. Some Likud supporters worry about empowering the controversial far-right Yisrael Beitenu leader, Avigdor Lieberman. He has been an undiplomatic foreign minister who has clashed with Israel's Arab minority and promoted legislation that appears to target liberal causes, such as human rights groups. He opposes concessions in Israeli peace talks with Palestinians.
Expectations are rising that Israel's centrist and left-wing parties will be re-energised by Mr Netanyahu's ideological shift. Already Labour leader Shelly Yacimovich has called for new alignments that will offer "an alternative to this extremist leadership".
The decision to form an electoral alliance was reportedly the result of secret negotiations between Mr Netanyahu and Mr Lieberman without senior officials present.
The joint list, which will reportedly be called "Likud Beitenu", was unveiled at a news conference in Jerusalem on Thursday night.
"One ticket will strengthen the government, it will strengthen the prime minister, and it will strengthen the country," Mr Netanyahu said.
"We are asking the public for a mandate to deal with the security threats, at the top of which is stopping Iran from obtaining nuclear weapons, and fighting terrorism.
"We are asking for a mandate from the public to continue the changes in the economy, in education and in the need to lower the cost of living."
Mr Lieberman said: "The merger is a combination of experience, force and unity. This is what Israel's citizens expect. Given the challenges, we need national responsibility."
"We are not like the fashionable parties that are created for one term, we are a true party that will allow the government to deal with challenges in the best way possible."'Extreme'
The chairwoman of the Labour party, Shelly Yacimovich, and the chairman of the Kadima party, Shaul Mofaz, were both quick to call on Israel's centrist parties to unite to challenge the new right-wing list.
End Quote Shelly Yacimovich Labour
Tonight Likud disappeared and instead there's an extreme Lieberman party”
"Netanyahu could tell that he was going to lose his job, and took a step inspired by political panic due to Labour's strength," Ms Yacimovich said.
"This step turns the Likud into Lieberman's party. Tonight, Likud disappeared and instead there's an extreme Lieberman party."
Mr Mofaz described the right-wing union as "a wake-up call".
Correspondents say the decision to join forces with Mr Lieberman will raise questions about whether Mr Netanyahu is still committed to the Middle East peace process.
Mr Lieberman, who was appointed foreign minister after Yisrael Beitenu finished third in the 2009 elections, has in recent months repeatedly criticised Palestinian Authority (PA) President Mahmoud Abbas, whom he has described as an "obstacle to peace".
The Moldovan-born politician favours a two-state solution, but advocates swapping parts of Israel that are predominantly Arab in exchange for Jewish settlement blocs in the occupied West Bank. He also wants a law demanding Israeli-Arabs pledge allegiance to Israel as a Jewish state.
However, one of Mr Netanyahu's advisers told the Jerusalem Post after Thursday's announcement that the prime minister continued to call for a resumption of negotiations with the PA without preconditions.