The question now is whether Netanyahu will form a narrow government with his hard-line allies or a broad government along with his centrist rival, Kadima Party leader Tzipi Livni. His choice will have serious ramifications for the Mideast peace process.
Peres made his announcement early Friday afternoon after holding meetings with Netanyahu and Livni. An official ceremony appointing Netanyahu was to be held shortly afterward.
Peres had been meeting political leaders as he decided which candidate would be given the task of forming a new coalition in the aftermath of Israel's national election last week.
The choice of Netanyahu was cemented on Thursday when Avigdor Lieberman, who heads the hawkish Yisrael Beiteinu (Israel Our Home) party, endorsed the Likud leader.
Kadima edged out Likud in the election, capturing 28 seats to Likud's 27. But Likud is in a better position to put together a coalition because of gains by Lieberman and other hard-line parties.
Netanyahu now can form a hard-line government or bring Livni into a broad coalition that would provide more stability and help Israel avoid a clash with the Obama administration and much of the world.
Emerging from her meeting with Peres, Livni said she would not join a hard-line government and was prepared to sit in the opposition "if necessary."
"I will not be able to serve as a cover for a lack of direction. I want to lead Israel in a way I believe in, to advance a peace process based on two states for two peoples," Livni said.
With Livni out, Netanyahu might have little choice but to forge a coalition with nationalist and religious parties opposed to peacemaking with the Palestinians and Israel's other Arab neighbors.
This could set Israel on a collision course with the U.S., the Jewish state's top international patron, and its new president, who has vowed to make Mideast peace a top priority. And Netanyahu's hold on power would be more tenuous in a narrow coalition of rightists, where his allies could bring down the government in the face of any concession for peace.
It seemed possible that Livni's vow to join the opposition amounted to posturing ahead of coalition bargaining following Lieberman's endorsement of Netanyahu. Lieberman is an immigrant from the former Soviet Union who based his campaign on requiring Israeli Arabs to swear allegiance to the Jewish state or lose their citizenship.
Lieberman's party came in third place in the Feb. 10 election, after Kadima and Netanyahu's Likud. That essentially allowed him to determine whether Netanyahu or Livni would be able to muster the backing of a majority in parliament.
Lieberman's stance toward Arabs has exposed him to charges of racism and many see him as a far-right extremist. However, he is opposed to the Orthodox Jewish establishment's control over key aspects of public life in Israel, one of several positions that has enabled him to find common ground with moderates.
While announcing his support for Netanyahu on Thursday, Lieberman said he preferred a national unity government that included Livni over a narrow hard-line coalition.
Putting together a broad, centrist government would be a tall order for Netanyahu.
Livni has said she will not join Netanyahu in a government unless she can be an equal partner, presumably through the sort of "rotation" agreement Israel has tried in the past in which an election's top two winners each get to be prime minister for half of the government's four-year term.
Netanyahu, however, has ruled out any such arrangement.
As the political wrangling in Israel gains momentum, sporadic violence continues in Gaza in the absence of a long-term cease-fire between Israel and Hamas. Militants fired mortar shells at an Israeli patrol along the Gaza-Israel border Friday, Israeli defense officials said, and the troops returned fire. There were no injuries reported.
Egypt has been trying to mediate a truce since Israel ended its Gaza offensive Jan. 18. Hamas wants Israel to open Gaza's blockaded border crossings, while Israel wants a halt to arms smuggling and the return of a soldier captured in 2006.
Netanyahu has said Israel must topple the Hamas government in Gaza and says Israel halted the Gaza offensive too soon.