1977-92
In 1977 the so-called "political upheaval" occurred. For the first time since the establishment of the state, a government was formed in which the Labor Party was neither the leader nor even a member. The new government was formed by the Likud, headed by Begin. Labor fell because the public had lost confidence in it after the Yom Kippur War, a succession of financial scandals, the weakness of the last Labor government, a sharp shift of the National Religious Party to the Right, and an open revolt by many Israelis of Moslem-country origin against the Labor establishment.

Before the elections Shimon Peres replaced Rabin as leader of the Labor Party.

During his first term, Begin reached a peace agreement with Egypt in 1979, following an historic visit to Jerusalem by then Egyptian president Anwar Sadat. The Peace Now movement was formed in 1978, when it seemed as though the Begin government was stalling over progress in the peace process.

In the economic sphere, the Likud embarked on a liberalization program, following years of centralized economic management by Labor, which nevertheless had allowed the development of a vital private economic sector, side by side with the public and Histadrut (trade union federation) sectors.

However, three finance ministers served in the first Likud government, and during the term of the second, formed by Begin in 1981, the economy got out of control. In October 1983 the bank shares collapsed, and by 1984 the annual rate of inflation was rapidly approaching a four-digit figure. In 1982 Israel also became involved in its fifth war -- the Lebanese War, also known as "Operation Peace for the Galilee" -- which was planned and executed by then defense minister Ariel Sharon. It was the first war not to be supported by most of the country and, as a result of the massacre of Palestinians by Lebanese Christians in the Beirut refugee camps of Sabra and Shatilla, Sharon was forced to resign. Due to the War getting out of hand, ill health, and the death of his wife, Aliza, Begin resigned in October 1983 and was replaced by Yitzhak Shamir.

The 1984 elections ended in a complete draw between the two main political camps and a national unity government was formed in which Labor Party leader Peres served as prime minister for the first two years, and Likud leader Shamir the following two. Labor's Rabin served as defense minister. This government managed to stabilize the economy and bring inflation down to two digits, while slowing the development of the Jewish settlements in Judea, Samaria, and the Gaza Strip; which had received a boost during the previous seven years of Likud government. The government also withdrew the IDF from Lebanon, except for the security zone in the South. Another national unity government was formed after the 1988 elections, even though Shamir could have formed a narrow government with the religious and more extreme right-wing parties. This government initiated a peace process, which was to have involved elections in the West Bank and Gaza Strip. However, the government fell in March 1990 over efforts to implement the peace plan with the Palestinians. After Peres failed to form an alternative government, Shamir formed a narrow coalition. In October 1991 the Madrid Conference convened: the first Middle East peace conference attended by Israel and almost all the Arab states. Bilateral and multilateral talks between Israel and its neighbors followed, but little progress was made. The government finally disintegrated due to the opposition of its more extreme right-wing members to the peace process. Before the early elections to the 13th Knesset in June 1992, the Knesset passed the Law for the Direct Election of the Prime Minister, to be implemented in the elections to the 14th Knesset.