MK Nir Orbach of Prime Minister Naftali Bennett's Yamina party placed an ultimatum on Monday saying he will not vote with the coalition until the controversial West Bank emergency regulations are extended.
Orbach said in a statement that he has "come to the conclusion that the coalition cannot continue to exist in its current conduct" and that it was failing to "fulfill its mission."
He noted, however, that he will not vote for the dissolution of the Knesset either for the time being.
This comes shortly after the conservative lawmaker warned the left flank of the governing alliance that he would seek to replace the sitting government if the bill, which extends legal protections to Jewish West Bank settlers, is not passed before the current regulations expire at the end of the month.
Israel captured the West Bank from Jordan in the 1967 Six-Day War but has never officially annexed the territory. Emergency regulations in place for decades apply parts of Israeli law to Jewish settlers in the West Bank.
If they are not renewed, that legal system will be thrown into question. It could also change the legal status of the 500,000 settlers living there.
Critics, including the Palestinians and three prominent human rights groups, have said the situation amounts to apartheid, an allegation Israel rejects as an assault on its legitimacy.
An attempt to extend the regulations was defeated in a Knesset vote last week after Arab coalition members broke party discipline and joined the opposition in voting against the bill.
After the vote, an incensed Orbach snapped at fellow coalition lawmaker MK Mazen Ghanaim of the Islamist Ra'am party and was seen approaching him before he was pulled back by ushers as he yelled "the experiment with you has failed."
The coalition will try to bring the bill up for a vote again after the Cabinet unanimously approved it on Sunday.
The pro-settlement legislator, who has long been considered a weak link in a governing coalition that features left-wing and Arab parties, has left his coalition partners hanging on tenterhooks amid reports he was engaged in rigorous talks with Opposition Leader Benjamin Netanyahu on a potential defection.
If Orbach ultimately decides to side with the opposition and dissolve the Knesset, thereby triggering a snap election, Foreign Minister Yair Lapid will assume the role of caretaker prime minister until another government is formed.
The Associated Press contributed to this story.