Mr Olmert pledged to withdraw from much of the West Bank but hold on to main Jewish settlements there.
"The continuation of scattered settlements throughout the West Bank creates an inseparable mix of populations that will threaten the existence of the state of Israel as a Jewish state," Mr Olmert said.
"The borders of Israel that will be formed in the coming years
will be significantly different from the territories that the state
of Israel holds today."
Israel’s parliament approved Mr Olmert's four-party coalition by 65-49 votes.
The vote of confidence in Mr Olmert's four-party coalition and 25-member cabinet followed four weeks of intense coalition talks led by his centrist Kadima party.
In his speech, Mr Olmert said Israel was endangering itself by maintaining isolated settlements in the West Bank, stressing that it was vital to maintain its Jewish majority by separating from the Palestinians.
"Even if the Jewish eye cries and even if our hearts are broken, we must preserve the essence. We must preserve a stable and solid Jewish majority in our state," he insisted.
Ambitious plan
Under the plan, some 70,000 settlers will be recalled from the occupied West Bank and "significantly different" borders would be drawn.
In turn, Mr Olmert plans to cement Israel's control over the major blocs in the West Bank which are home to the vast majority of the 250,000 Jewish settlers.
The plan is a far more ambitious than last year's withdrawal of 7,000 setters from the Gaza Strip, the first time Israel had fully left occupied Palestinian territory.
It was fully supported by Mr Olmert.
"The disengagement from the Gaza Strip and northern Samaria was an essential first step in this direction, but the main part is still ahead," he said.
Unilateral action, if necessary
Mr Olmert vowed Israel’s borders would be fixed, with or without a deal with the Palestinians.
The Kadima party leader has refused to negotiate with the Palestinians since the militant group won the elections.
He has however insisted he will hold talks if Hamas stops attacks and dismantles militant groups.
Hamas has sent dozens of suicide bombers into Israel.
Palestinian call for talks
Palestinian President, Mahmud Abbas, appealed to Mr Olmert to resume peace talks with him immediately.
"You have a serious partner. We are a partner for negotiations," Mr Abbas told the Israeli newspaper Maariv.
Mr Abbas has also warned against unilateral action.
Palestinian legislator Saeb Erekat said Mr Olmert should take up the offer.
"We urge Mr Olmert to abandon the ways of unilateralism and opt for a partnership in order to bring about a new reality for Palestinians and Israelis," he said.
Some Israeli MP’s are calling for a hardline against the Palestinians.
The leader of the far-right Yisrael Beitenu party sparked uproar by calling for the execution of Israeli Arab MPs who have been in contact with the Islamists.
"During the Nuremberg trials at the end of World War II not only the criminals but their accomplices were executed. I hope this will be the fate of the collaborators in this house too," Avigdor Lieberman told parliament.
Likud party leader, Benyamin Netanyahu, also attacked Mr Olmert's plan, saying unilateral measures would only strengthen hardliners such as Hamas.
Washington’s ally
The White House on Thursday voiced support for the new coalition government in Israel and its prime minister, Kadima party leader Ehud Olmert, saying that the United States has no better ally.
"The president looks forward to working with the prime minister and the new government," said White House spokesman Scott McClellan.
"No one has been a greater friend of Israel than the United States, and this president has been a staunch supporter of Israel, and he will continue to be so," he said.