Members of the party's decision-making central committee voted by 667 votes to 633 to endorse Mr Peretz's list of six ministers who will join him in the government which will be led by prime minister designate Ehud Olmert.
A number of lawmakers, disappointed at being left out of government, had been demanding the committee rather than the party leader decide on the line-up.
Defeat for Peretz, whose entry into government as defence minister did not need approval, would have been profoundly embarrassing and could have delayed the formation of a coalition to fix Israel's final borders by several weeks.
But the former trade union chief, who surprisingly ousted renowned former premier Shimon Peres six months ago, won the day after a heated conference which saw him round on his opponents as well as appeal for unity.
Mr Peretz, who is a long-time dove, told delegates after the vote that he would battle any move by Mr Olmert in cabinet to unilaterally fix the borders of the Jewish state until he was convinced that no agreement with the Palestinians was possible.
"The Palestinians must know that we will not proceed with unilateral initiatives in Judaea-Samaria (West Bank) before we have exhausted every possible means for dialogue. This is laid down in our program of government."
Several coalition partners
He also said that a coalition agreement signed with Kadima made a specific commitment "to reduce our presence in Judaea-Samaria".
Criticism of Mr Peretz has been largely centred around what some perceive as an autocratic style and his lack of security background.
Former minister Matan Vilnai, one of the chief rebels, had told delegates it was vital that they be involved in the process of choosing the ministers.
"The time has passed since the party was the preserve of one man," he told the meeting.
Labour won 19 of the 120 seats in parliament in last month's election, runners-up behind Kadima which won 29.
Under Israeli law, Mr Olmert has until Thursday to present a cabinet for approval by parliament although he can apply for a two-week extension.
All coalition partners will have to accept the principles of his so-called convergence plan under which Israel will fix its final borders, with or without Palestinian agreement.
The plan will see around 70,000 Jews uprooted from the occupied West Bank. In turn, Olmert will cement control of the big housing blocs where the majority of the quarter of a million settlers live.
The ultra-nationalist Yisrael Beitenu appeared unlikely to join the coalition after its leader Avigdor Lieberman reiterated his criticism of the convergence plan, while adding that the ball was in Mr Olmert's court.
Having already enticed the Pensioners party into government, Olmert also struck a deal on Sunday with the ultra-Orthodox Shas party. He is still negotiating with another Orthodox religious group, United Torah Judaism.