1970s

Logo used by the party in 1977

The seventh Knesset also covered the event that played a major part in the party's downfall. On 6 October 1973, as Israelis were observing Yom Kippur, a surprise attack was launched by Egypt and Syria, resulting in the Yom Kippur War. Although Israel later recovered the ground initially lost, the war was generally considered to be a failure, and the government faced significant criticism. The Agranat Commission was set up to examine the circumstances that led to the war.

Before the Commission could publish its results, an election was held. Anger at the government was not significantly noticeable, as the Alignment still won 39.6% of the vote and 51 seats. More significantly, the new major right-wing party, Likud, won 39 seats, and was now breathing down the Alignment's neck. Meir formed a coalition with the National Religious Party and the Independent Liberals. However, ten days after the Agranat Commission published its findings on 1 April 1974, Meir resigned, despite the report clearing her and her Defence Minister, Moshe Dayan, of all responsibility.

Yitzhak Rabin took over the Labor Party, beating Shimon Peres in a leadership contest. This battle led to a long-term falling out between the two, after Rabin described Peres as an "indefatigable intriguer" in his autobiography. Rabin formed a new government with Ratz, the Independent Liberals, Progress and Development and the Arab List for Bedouins and Villagers, another Israeli Arab party associated with the Alignment. The National Religious Party joined the coalition soon after, though their arrival precipitated the departure of secularist Ratz.

The party's internal divisions were also beginning to show. Mapam broke away, as did Progress and Development and the Arab List for Bedouins and Villagers, who had both come under the Alignment umbrella during Rabin's tenure. Although Mapam returned to the fold shortly afterward, the two Arab parties permanently broke their ties with Alignment. Instead, they created the United Arab List. Two other MKs, Aryeh Eliav and Mordechai Ben-Porat, also left the party. Eliav went on to form Ya'ad – Civil Rights Movement and then the Independent Socialist Faction, and Ben-Porat remained an independent MK.

In 1976 the Alignment government was hit by the Yadlin affair regarding illegitimate financial transactions by senior members of the party, notably Asher Yadlin and Avraham Ofer. The following year Rabin fell victim to a double scandal, when it was revealed his wife, Leah had a foreign currency bank account, illegal in Israel at the time; the episode becoming known as the Dollar Account affair. He also took responsibility for an apparent breach of the Sabbath on an Israeli Air Force base. Rabin resigned over the former incident, and Peres took over as Prime Minister just a short time before the next elections.

Shortly before the election, the Alignment party suffered another major blow when Rabin announced that US President Jimmy Carter supported the Israeli idea of defensive borders.^[3] Peres led the party into the 1977 elections, which proved to be a historical turning point in Israeli political history: For the first time the left-wing were defeated. The Alignment won only 24.6% of the vote, a decrease of over a third, and picked up just 32 seats. In contrast, Menachem Begin's Likud won 43 seats. Begin was able to form a right-wing coalition with Shlomtzion (which quickly merged into Likud), the National Religious Party, Agudat Israel, and Dash. Even after Dash disintegrated, Begin still held a majority.

Although the disastrous Yom Kippur War was a factor in the party's heavy defeat, allegations of corruption and nepotism (highlighted by the various scandals) and anger at the party's perceived bias towards Ashkenazi Jews over Mizrahi Jews also played major roles in the election result.

Further embarrassment for the Alignment was brought about as Begin offered Moshe Dayan the position of Foreign Minister despite his party not being in the coalition. Dayan accepted the offer, and was expelled from the party. After sitting as an independent MK, he founded Telem.

However, the Alignment still had an important role to play, as it helped pass the Camp David Accords and the Egypt–Israel peace treaty in the Knesset. This was necessary as many Likud MKs had broken away to form opposition parties (One Israel, Rafi – National List, Tehiya and Yosef Tamir as an independent) and several others (including Ariel Sharon and Yitzhak Shamir) abstained from voting on it.

Despite losing Dayan, the party picked up two more seats as former Dash MKs Meir Amit and David Golomb defected from Shinui.

1980s

Symbol of the second Alignment, with a stylized Star of David

The party recovered well in the 1981 elections as it gained 36.6% of the vote, an improvement of 12%, and 47 seats. However, Likud took 48, allowing Begin to form the government with the help of small right-wing and religious parties. Ratz briefly merged into the Alignment, but broke away again. Nevertheless, by the end of the Knesset session the party had more seats than its rival as two Likud MKs had defected to join it. The Alignment was also boosted when the Independent Liberals joined the alliance in 1984, though they held no seats of their own at the time.

With Peres still at the head of the party, the 1984 elections resulted in stalemate. Although the Alignment won 44 seats to Likud's 41, it could not muster enough support from suitable smaller parties to form a government (the next largest party had only five seats, and two of the small left-wing parties, Hadash and the Progressive List for Peace were not viewed as potential coalition partners due to their radical left-wing views). However, the Likud found itself in the same situation (Kach being impossible to work with). The result was a grand coalition of the Alignment, Likud, the National Religious Party, Agudat Israel, Shas, Morasha, Shinui and Ometz (which later merged into Likud). With 97 seats, it was the largest coalition in Israeli political history aside from national unity governments.

Peres and new Likud leader Yitzhak Shamir agreed to share power, with Peres Prime Minister for the first two years of the Knesset term and Shamir for the last two. When Shamir took over, Shinui left the coalition. The Alignment ended the session with six less MKs, as Mapam broke away from the party, unhappy at the power-sharing agreement with Shamir. The party also lost one MK to Ratz (Yossi Sarid), one to Shinui (Yitzhak Artzi) and one to the newly formed Arab Democratic Party (Abdulwahab Darawshe) but replaced them when the three-man Yachad merged into the Alignment.

The result of the 1988 elections was also ambiguous, with Likud winning 40 seats and the Alignment 39. Another power-sharing arrangement was made, and the coalition again had 97 members, consisting of Likud, the Alignment, the National Religious Party, Shas, Agudat Israel and Degel HaTorah.

However, in 1990 Peres made a bid for sole power through the creation of a narrow 61-seat coalition with the Ultra-orthodox parties Shas, Agudat Israel and Degel HaTorah and the left-wing Mapam, Ratz and Shinui. Ultimately the bid failed, and the Alignment was kicked out of the coalition for the last two years of the Knesset's term. The party also lost one MK, Efraim Gur, who left and set up Unity for Peace and Immigration before joining Likud. The affair later became known in Israel as "the dirty trick".

On 7 October 1991 the Independent Liberals formally merged into the Israeli Labor Party. As the Independent Liberals were the sole remaining Alignment members, the alliance ceased to exist.