"We said clearly that if there would be negotiations on the core issues, we wouldn't be in [the government]," Lieberman told a press conference in Jerusalem on Wednesday morning.
Lieberman, who served as strategic affairs minister in Prime Minister Ehud Olmert's government, said peace talks must address the issue of transferring the Israeli Arab population to Palestinian control.
"From our point of view, the concept of land for peace is out of the question," said Lieberman. "The principle must be exchanges of territory and population."
The outgoing minister said a withdrawal to the pre-1967 borders would not bring peace or an end to terrorism. "You know what will happen the day after we withdraw to the 1967 borders?" asked Lieberman. "Israeli Arabs will request Palestinian citizenship, and will continue to receive social security payments from the State of Israel."
"They don't hide this - they say quite clearly that they will demand autonomy in the Galilee and the Negev, and will never recognize Israel as a Jewish state," he continued.
"Its not that we oppose the solution of two states for two peoples," said the Yisrael Beitienu chairman. "On the contrary, we support it - two states for two peoples, not a state and a half for one people and half a state for the other."
"We can't accept the assymetry of a Palestinian state without a single Jew, and Israel becoming a binational state with more than 20 percent minorities," he continued.
"Our problem is not with the Palestinians, it is with Israeli Arabs," he said. "[Israeli Arab MKs] Ahmed Tibi and Mohammed Barakeh are more dangerous than [Damascus-based Hamas leader Khaled] Meshal and [Hezbollah leader Hassan] Nasrallah, because they operate from within."
In response, Tibi accused Lieberman of being "worse than [Austrian far-rightist] Jorg Haider."
"A government without Lieberman is a government that is less bad," said Tibi. "He gives racists around the world a bad name."
Barakeh, for his part, urged Attorney General Menachem Mazuz to outlaw Yisrael Beiteinu. "Lieberman is not only a threat to peace but also to democracy," he said. "He is afflicted with a severe case of racist AIDS."
Olmert's associates pointed out Tuesday that even without Lieberman, the coalition would still have a stable majority of 67 MKs. Moreover, they said, it might be possible to bring new parties into the government, such as United Torah Judaism or even Meretz.
"Thank god we ridded ourselves from the biggest racist on the political spectrum," Meretz MK Ran Cohen said. "The government must take this opportunity to advance the peace process and remove illegal outposts."
In response to Lieberman's resignation, The Prime Minister's Office said that Olmert thanked Lieberman for his cooperation while he was in the government but made clear that there is no alternative serious to negotiations towards peace.
"In light of the diplomatic actions of late, differences in opinion with Lieberman and his party members led to his resignation from the government," the PMO said in a statement.
During the press conference, Lieberman also rejected the possibility that Yisrael Beiteinu would unite with the Likud party before the next elections.
Yisrael Beiteinu's resignation will now likely shift the focus to Shas, the other right-of-center party in the coalition, which has said it could tolerate negotiations on borders and refugees, but would resign immediately on orders of its spiritual leader, Rabbi Ovadia Yosef, should Jerusalem be on the table.