The burgeoning crisis, which could mean the second general election in some two years, is set to come to a head tomorrow when MPs vote on a bill to dissolve the Knesset, or parliament.
It comes in the wake of a growing wave of Palestinian unrest and deadly "lone wolf" attacks, with the prospect of peace more remote than ever.
Cracks in Netanyahu's right-leaning coalition emerged over the 2015 budget and a contentious bill aimed at enshrining Israel's status as the Jewish state in law, a move critics say could harm its Arab minority.
The two parties account for 25 of the coalition's 68 seats.
Washington and Europe have also expressed concern over the bill due to be debated this week.
Coalition tensions brewing for months came to a head Monday after Netanyahu-Lapid talks aimed at heading off the crisis collapsed.
The coalition was pieced together after a January 2013 general election, with the next poll theoretically due in November 2017.
Abraham Diskin, a political scientist at the Hebrew University of Jerusalem, told AFP the likelihood of avoiding early elections was "very close to zero".
"It's early elections -- politically, that's the situation," he said.
Tomorrow's no confidence vote will be preliminary. In order to pass it will need an absolute majority within the 120-member Knesset in its third reading, requiring support from members of the ruling coalition.
Sources within Netanyahu's Likud party told AFP the bill was expected to pass.
On Monday, Netanyahu demanded Lapid accede to five demands for the government to continue -- including agreement to freeze his own flagship initiative for zero percent VAT on first home purchases, and to support the Jewish state bill. Lapid refused.
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