Jewish Home leader, Education Minister Naftali Bennet, said that he and his deputy Ayelet Shaked were leaving to form a new party of "religious and secular together... in true partnership".
The party will be called "New Right" and will pursue hard-line security policies and oppose a Palestinian state, Bennet said.
Jewish Home had eight of the Israeli parliament's 120 seats and drew heavily on support from Israeli settlers in the occupied Palestinian West Bank.
The far-right party has been stagnating in opinion polls after failing to attract support from secular Israelis.
It is not immediately clear if the Jewish Home was continuing as a political party.
The shock move by Bennet and Shaked, the Israeli justice minister, is designed to appeal to secular voters and undermine a centre-left opposition energised by the candidacy of Israeli ex-general Benny Gantz.
Polls have shown that if Gantz - who headed the military from 2011 to 2015 - were to run with a party then the entity could claim 13 to 20 seats of the 120 up for grabs in Israel's Knesset.
Israeli Prime Minister Binyamin Netanyahu's coalition was left with a one-seat majority after defence minister Avigdor Lieberman stepped down in November over a controversial ceasefire deal in the Gaza Strip.
Polls say Netanyahu looks set to extend his long reign at the top of Israeli politics, but a slew of corruption investigations have cast a cloud over his future.
Another former military chief Moshe Yaalon, who served as Netanyahu's defence minister from 2013 to 2016, unveiled his own party this week.
A former member of Netanyahu's Likud party, Yaalon has become a critic and rival of his former boss.
Some media outlets speculated that Yaalon and Gantz could join forces for the election on a centre-right