1992-1996
In 1992 the Labor Party, once again headed by Rabin after replacing Peres in February, won the election and formed a government with Meretz and Shas. It was not that the Left received more votes than the Right, but that the Right lost votes because it was split; several right-wing parties failed to pass the 1.5 percent qualifying threshold. The main issue in the election was the future of the peace process.

The new Labor government changed the order of priorities in the allocation of funds, especially shifting funds from the settlements to the development towns inside the Green Line (the pre-1967 boundaries of Israel). While there was no breakthrough in the talks with Syria, despite the government's willingness to return all or most of the Golan Heights in return for a full peace, there were major breakthroughs with the Palestinians in the form of the Oslo Accords signed in September 1993.

After years of secret flirtations with King Hussein of Jordan, peace was signed with Jordan in October 1994. Improvement continued in Israel's international status, including the almost total disappearance of the effects of the Arab boycott, which had begun following the Madrid Conference. However, terrorist attacks against Israelis by members of the Palestinian rejectionist front became fiercer and more daring.

On November 4, 1995 Yitzhak Rabin was murdered by Jewish assassin Yigal Amir, who objected to the peace process and the handing over of territories to the Palestinians. At first the assassination strengthened Labor's position, but under the renewed leadership of Peres, and with the further intensification of terrorist attacks, the first direct election of a prime minister was won by the Likud's new leader, Binyamin Netanyahu -- the first prime minister born in the country after the establishment of the state.