This week Ehud Barak, defence minister of the most rightwing government in Israel's history, abandoned the Labour party to form a new centrist faction, which remains in the coalition with four ministerial portfolios.

In the immediate future, this could strengthen Binyamin Netanyahu's government. But with Labour out of the government, there is now a clear alignment of left and centre parties: a much-needed opposition.

The coalition may look more uniform without Labour, but it barely holds together:

• The Likud party under Netanyahu is heir to the old Revisionist Zionists who claimed all of Palestine as their birthright.

• The Shas party, of North African origin, represents largely underprivileged religious voters who are more flexible on the issue of Israel's borders.

• Israel Beitenu, an anti-clerical party founded by Russian immigrants, tables racist laws against the country's Arabs; its leader, Avigdor Lieberman, currently rejects the two-state Israel/Palestine idea (which Netanyahu professes to support).

• Orthodox rabbis with theocratic yearnings head the United Torah Judaism party.

All that keeps these odd partners together is an aggressive nationalism, or ethnocentricity.

The official opposition, the centrist Kadima, is headed by Tzipi Livni – who until now has proposed no alternative to coalition policies. To its left is the small liberal, human rights party, Meretz.

The Arab-Israeli parties range from Islamists to the communists in Hadash, the Arab-Jewish party.

Were they all to unite in opposition, together with the decimated Labour party, there might be hope of progress on the Palestinian front.

The time is ripe for an end to the conflict. There is peace with Egypt and Jordan, the Arab League makes overtures and most Arab states are hostile to Iran, Israel's chief enemy. Syria wants to negotiate. Israel's military deterrent is effective against all but irregular forces, the Palestine Authority needs only an end to settlement building to resume talks, and Hamas is prepared for an indefinite truce, if not for formal recognition.

But Netanyahu's government prefers the status quo to the risks of ending the occupation, and exploits widespread fears to avoid territorial compromise. There are fears that the Palestinians may "delegitimise" Israel by diplomatic means, that civilians are unprotected against long-range missiles (a 90-second warning) and that the region is unstable. An insular government ignores the changes in the balance of power internationally and in the Middle East, is over-confident of US support and complacent about Israel's current prosperity – despite extremes of wealth and poverty.

Two problems block the formation of a coherent opposition. First, Israeli parties have fissured and multiplied throughout the state's existence. Proportional representation has perpetuated the trend; only two governments have run their full term. Each party has its own agenda and alliances are temporary (to say nothing of the unlikelihood of mainstream Jewish parties uniting with Arabs).

The second, less obvious, problem is the absence of agreed democratic norms. Many of the voters in the heterogenous Israeli electorate are accustomed to authoritarian leadership elsewhere: Middle Eastern, Soviet, ultra-Orthodox.

Successive immigrant populations (many of whom were refugees, not even Zionists) adjusted only with difficulty to the world of the socialist elite, which for the first 30 years of the state dominated coalition governments. The libertarian and egalitarian sentiments of the declaration of independence never became a written constitution. Therefore state and religion are not disestablished; the status and rights of minorities remain undefined, as does the right to free speech, despite a democratic parliamentary system.

In place of a constitution, Israel has its Basic Laws, covering subjects as diverse as the Knesset, the army and what is loosely called "human dignity and freedom". But successive attempts to outlaw Arab parties from the Knesset have been blocked only by the supreme court – Israel's foremost defender of the rule of law, but whose rulings have sometimes been ignored.

The army is formally subordinate to parliament but, though there is a three-year moratorium between leaving the army and entering politics, most defence ministers have been former chiefs of staff. Civil rights can be suspended for "security reasons" and politics infiltrates army life: West Bank settlers are prominent in the army elite. The "human dignity" law makes no mention of women's rights, gay rights or freedom of religion, while emphasising bizarrely a right to "privacy".

So ultra-Orthodox rabbis, following archaic rulings, define Jewishness – hence, indirectly, the right to citizenship – while the state subsidises their perpetual students who neither work nor enlist in the army. Arab Israelis, 20% of the population, are underrepresented in public and professional life, and lack proportionate government funding and housing.

Coalition members have recently tried to muzzle criticism on issues like the Gaza campaign, municipal rabbis' warnings against renting to Arabs and the proposed deportation of the Israeli-born children of foreign workers, and have suggested withdrawing subsidies from protesters in the arts and universities.

In the absence of an opposition, Israelis have recently taken to the streets. A younger, educated generation has (with a few noble exceptions) shunned a career in politics. Now it has come out in force, with veteran human rights campaigners, to participate in the tens of groups that form a vigorous and growing force. They monitor checkpoints in the West Bank and military courts, join Palestinians in demonstrations against land grabs and settler violence, combat attempts to ban Arabs from Jewish towns, demonstrate against the dispossession of Jerusalem's Palestinians, fight the deportation of foreign workers, and oppose religious intolerance. Joint Jewish-Arab organisations multiply.

But protest alone cannot bring change. Polls suggest that the majority of Israelis accept Palestinian statehood and are prepared for concessions, yet voting patterns are ambivalent and Israel's history suggests that catastrophes best focus minds. A resolution at the UN condemning the occupation may be imminent; the uneasy quiet on the frontier with Lebanon may not last. Meanwhile the government must be challenged from within parliament, not just from without.