Gabbay, 50, a relative newcomer to Israeli politics, last year defected to Labor from the centre-right Kulanu party
Outsider Avi Gabbay was elected chairman of Israel's opposition Labor party on Monday by beating veteran Amir Peretz, a former defence minister and trade union chief, in a leadership runoff.
Gabbay, 50, a relative newcomer to Israeli politics, last year defected to centre-left Labor from the centre-right Kulanu party, which is part of Prime Minister Benjamin Netanyahu's right-wing coalition government.
Labor and a smaller party headed by Tzipi Livni, a past foreign minister, have formed the Zionist Union, the largest opposition faction in the 120-seat Knesset with 24 seats.
Elections are not due until 2019 and Netanyahu's strong position at the helm of Israeli politics appears secure, although he could be damaged by investigations in two criminal cases in which he denies wrongdoing.
"[Israel] needs a leadership that is capable of taking significant decisions for the good of everybody, that looks after Dimona (the working classes) and not just after Amona (West Bank settlements)," Gabbay said in his victory speech.
Although not a lawmaker, Gabbay served as environment minister in Netanyahu's government. He quit in 2016 in protest at the sacking of defence minister Moshe Yaalon to make way for Avigdor Lieberman from a rightist coalition partner.
Gabbay, who headed Israeli telecommunications firm Bezeq before joining politics, says he supports two states for two peoples as a solution to the conflict with Palestinians. He did not voice opposition to the expansion of illegal Israeli settlements in the West Bank while on Netanyahu's government.
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He told Haaretz he would stop building activity outside settlement blocs if elected prime minister, but he ruled out unilateral withdrawal from the West Bank.
Jerusalem-born Gabbay, the son of immigrants from Morocco, does not have a seat in the current parliament and so in his victory speech he asked Isaac Herzog to stay on as opposition leader for the time being.
Gabbay garnered 52.4 percent of the Labor membership vote to overcome Peretz, a previous party leader who was supported by most of its establishment. Peretz won last week's initial party vote with Gabbay second, and Herzog finishing third.
Recent polls had predicted that with Herzog at the helm, the Zionist Union would fare far worse than in the 2015 elections and would fall behind Yair Lapid's centrist Yesh Atid party but Gabbay's win could bolster Labor's fortunes, pundits said.