Shortly before the cabinet meeting, Olmert attended a handover ceremony at the prime minister's office, which remained empty since former premier Ariel Sharon suffered a massive stroke in January.
"We will change Israel's character in the coming years in order to promise it becomes a state with a solid Jewish majority within defensible borders," the incoming premier said at the ceremony.
The government's ambitious goal to redraw the Jewish state's borders in the occupied West Bank, with or without Palestinian agreement "will separate us from those who should live side by side with us and not among us", Olmert said.
The so-called convergence plan will involve the uprooting of tens of thousands settlers from the West Bank while cementing control of the large blocs, which are home to the vast majority of the quarter-of-a-million strong settler population.
The potential for trouble ahead was seen in the West Bank city of Hebron on Sunday when Israeli security forces evicted dozens of hardline settlers who had taken over a Palestinian house.
Even though the police and army managed to prevent violence from breaking out, settlers and their supporters hurled eggs and paint at the forces.
Olmert told the cabinet that settler violence would not be tolerated.
"We shall not accept thuggery and attempts to illegally establish facts on the ground," he said.
He also made clear that spending on illegal Jewish settlements will be vastly reduced and will instead be concentrated on relatively underdeveloped areas such as the southern Negev and northern Galilee regions.
Former prime minister Shimon Peres is now at the head of a new government department for regional investment, underlining the change of emphasis.
In a significant boost to Olmert's policy, the US investor Warren Buffett closed a deal over the weekend to acquire the Galilee-based metalworks company Iscar for $4 billion - giving the Israeli government a tax windfall of around $1 billion.
"This is not merely an investment of billions of dollars. This is the largest investor on the face of the earth," Olmert told reporters on Sunday.
"He [Buffet] is not Jewish, nor is he a Zionist. The Israeli economy is such that he believes in it and supports it."
As the Tel Aviv exchange hit an all-time high on the news, Peres described the deal as "a declaration of confidence in Israel's economy".
"This is very encouraging news for the Galilee ... It can give a major boost to other projects in Israel as well as the wider region," he told Israeli radio.
Stef Wertheimer, the founder of Iscar, said in an article for the Yedioth Ahronoth daily that the sale was symbolic of a new era.
"Our deal is unimportant, the money is unimportant," he wrote. "What is important is how to build the land of Israel anew, the Negev, the Galilee - Israel needs to leave behind its image of misery and of the army and security and become part of the world."
During the meeting, the 25-minister cabinet also overwhelmingly endorsed the finance bill whose focus marks a significant break from the past by slashing expenditure on settlements.
"The budget has been unanimously voted by the members of the government," trade minister Eli Yishai confirmed in brief comments after the cabinet met.
The finance bill will now be immediately passed over to parliament where the second and third readings should take place in rapid succession. The budget must pass by mid-June or else the government will collapse.
Negotiations were to resume on Sunday between Kadima representatives and negotiators from the leftwing Meretz and ultra-Orthodox United Torah Judaism parties about joining the government and thus giving Olmert a more stable majority for his masterplan to redraw Israel's borders.
© 2006 Agence France-Presse
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