Dutch Queen Beatrix has asked the leader of the Liberal VVD party to form a cabinet backed by the party of anti-Islamist populist Geert Wilders.
Mark Rutte will now head a centre-right coalition with the Christian Democrats (CDA).
The minority cabinet will have support of Mr Wilders' Freedom Party (PVV), which will remain outside the government.
The government says it plans to ban the full Islamic veil in the Netherlands.
It also wants to cut the budget by 18bn euros ($24bn; £15bn) by 2015, imposes curbs on immigration and increase the number of police officers.
The Liberals (VVD) and CDA hold 52 seats in the 150-member parliament and will have to rely on the PVV's 24 MPs to get legislation passed.
The coalition deal has angered some CDA MPs who do not want to work with Mr Wilders.
Earlier this week, he went on trial in Amsterdam on Monday on charges of inciting hatred with his film Fitna (Division).
The film juxtaposes the Muslim holy book, the Koran, with the 9/11 attacks in which nearly 3,000 people in the US were killed in 2001.
The Netherlands has been run by a caretaker government since February when a coalition led by the CDA's former leader, Jan Peter Balkenende, collapsed after a row over military involvement in Afghanistan.
June's general election delivered a surge of support for the Freedom Party, which won the third biggest share of seats in parliament.