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Israel's prime minister has dismissed his finance and justice ministers and declared he wants parliament dissolved, triggering an early general election. Benjamin Netanyahu said Yair
Mr Netanyahu explained that he wanted an election held two years early to win "a clear mandate to lead Israel".
Disagreements over a series of economic and political policies have strained relations within the coalition.
Under Israeli electoral law, voting would probably take place in mid-March if the Knesset were to be dissolved this week.
'Unnecessary'
Talks on Monday night between Mr Netanyahu and Mr Lapid - who leads Yesh Atid, the centrist party that is the second largest in the governing coalition - ended without an agreement on how to settle their disputes.
Mr Netanyahu and his ministers have disagreed about the content of a bill designed to strengthen the Jewish nature of the Israeli state and over a proposed tax break for first-time home buyers, which Mr Lapid regards as his signature issue.
On Tuesday morning, Mr Lapid told an economic conference that the prime minister had "decided to take Israel to unnecessary elections".
The chairman of Mr Netanyahu's right-wing Likud party, Danny Danon, blamed the move on what he called the finance minister's "amateurish antics".
As speculation about an election mounted, Ms Livni said it would not be about tax but about replacing a government she accused of "extremism, provocativeness and paranoia". The government did not know how to fight terrorism while also "upholding freedom and Zionism", she added.
Ms Livni, who leads the centrist Hatnua party, also accused Mr Netanyahu of "inciting sectors in Israel against each other" and said she "refused to compromise on any of the values that have guided me".
Later, Mr Netanyahu's office issued a statement announcing: "The prime minister plans to call for parliament's dissolution as soon as possible and to go to the people and get a clear mandate to lead Israel."
It also said he had ordered the dismissal of Mr Lapid and Ms Livni.
"In past weeks, including the past day, ministers Lapid and Livni have harshly attacked the government that I head. I will no longer tolerate an opposition inside the government," the statement added.
The BBC's Kevin Connolly in Jerusalem says the prime minister is thought to regard Mr Lapid as being too ambitious for comfort.
Mr Netanyahu may be hoping to return to power at the head of a re-formulated coalition in which Yesh Atid would be replaced with a religious bloc representing the interest of ultra-Orthodox Jews, our correspondent adds.
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