"Were I to stay in office, I would not be able to look southern residents in the eye", Lieberman told reporters, referring to Israelis subjected to a surge in Palestinian rocket attacks before Tuesday's truce took hold.
The Israel Defense Forces (IDF) said on Monday evening they had struck more than 30 militant sites in response to more than 300 rocket and mortar launches from Gaza fired following the Israeli undercover raid on Sunday night.
Haaretz cited sources close to Lieberman who said he made a decision to resign after Netanyahu's office told the media the defense minister supported the ceasefire with Hamas, despite his own protestations.
Israeli Defense Minister Avigdor Lieberman has resigned out of protest, following the country's cease-fire with Hamas in Gaza.
Defence Minister Avigdor Liberman, who has urged the government to strike a harsh blow against Gaza's Hamas rulers, quit after the security cabinet chose to accept a truce halting a two-day flare-up of fighting in Gaza.
Prime Minister Benjamin Netanyahu will take over on an interim basis.
After two days of fighting sparked by the deaths of seven Palestinians and one Israeli soldier, Israel's cabinet agreed to a cease-fire on Tuesday, the BBC reported. None of the top national leaders-including the prime minister, defense ministry or any other member of the Security Cabinet-bothered to offer even a rudimentary explanation for the move in order to at least try to sooth the raw emotions of some 800,000 Israelis who just spent a frightful 48-hours huddled in bomb shelters.
At least 15 Palestinians and two Israelis were killed in two days in the worst violence the strip has seen in two years.
"The Jewish Home faction unanimously voted in favor of the decision to demand the defense portfolio in order to change security policy and restore Israel's initiative and deterrence".
Palestinians survey the rubble from a destroyed residential building hit by Israeli airstrikes in Gaza City on Tuesday.
"What happened yesterday with the cease-fire with Hamas was a capitulation to terror", Liberman said in announcing his resignation.
The exchanges that followed were the fiercest since the Gaza war in 2014, the third between Israel and Hamas in a decade as part of the wider Israel-Palestinian conflict.
Meanwhile, crowds of Palestinians have gathered in various places in the Gaza Strip to celebrate what they call "the victory of the resistance", where candies were distributed in the streets and Palestinian flags were flown.
Lieberman also said his party was leaving Prime Minister Benjamin Netanyahu's coalition, leaving the premier with only a one-seat majority in parliament.
Hamas has celebrated Lieberman's departure as a "victory for Gaza" and a "recognition of defeat against Palestinian resistance", according to reports.
A Palestinian labourer from the occupied West Bank was killed when a rocket hit a building in the Israeli city of Ashkelon.