The decision was an about-turn for Netanyahu, who just last week dissolved the panel whose recommendations he has now endorsed, after a key coalition partner threatened to withdraw from the government.
"We are citizens of one state, and must all share the burden of its service," he said at the opening of his weekly cabinet meeting, after the Likud party voted to endorse the findings of the so-called Plesner committee.
Netanyahu cautioned that moves to expand the national service of Arab Israelis and ultra-Orthodox Jews "must be executed gradually and in a way that will not cause a rift in the national unity."
"The new law to be proposed will be applied to everyone: secular, ultra-Orthodox Jews, Jews, Arabs -- everyone," he added.
Before the cabinet meeting, the Likud party voted unanimously to adopt the proposals that the committee head, Yohanan Plesner, made public last week despite Netanyahu's dissolution of the panel.
Netanyahu's government will now move towards drafting a law requiring all sectors of Israeli society to complete either military or community service, with penalties to be levied on those who fail to comply.
The Plesner panel also called for increased incentives and benefits for those who serve, as well as efforts to combat draft-dodging.
The new law will replace the so-called Tal Law, which contained national service exemptions for ultra-0rthodox Jews and Arab Israelis, but was overturned by Israel's High Court earlier this year.
Netanyahu's decision to endorse the Plesner committee's findings appeared to head off the possibility of a coalition crisis.
The Kadima party headed by Shaul Mofaz, which joined the government in May, giving Netanyahu a massive parliamentary majority, had threatened to quit the coalition over the issue of military service for all.
But after the Likud party decision, Netanyahu's office said the Prime Minister and Mofaz had agreed on the formation of a panel to draft the new law.
"Prime Minister Benjamin Netanyahu and vice prime minister Shaul Mofaz are in agreement on the formation of a commission charged with drawing up a law on the equality of service to be presented at the next government meeting," it said.
Mofaz and deputy premier Moshe Yaalon will be part of the commission, as well as Plesner, a Kadima member of parliament.
Mofaz made no public statement following the decision and sources in his party were reserved in their reaction to an apparent political victory for the Kadima leader over Netanyahu.
"We are carefully considering it a step in the right direction," a Kadima official told AFP. "But ultimately, the real test will be in the legislation, which must uphold the principles of equal service to all and create a historic change."
The issue of expanding national service to all sectors of Israeli society has proved thorny for Netanyahu, whose coalition groups secular parties like Kadima and the ultra-nationalist Yisrael Beitenu as well as ultra-Orthodox parties opposed to compulsory service.
The issue has also resonated throughout Israeli society, with thousands of Israelis taking to the streets in Tel Aviv on Saturday night to call on the government to require all sectors of society to participate in national service.
Military service is compulsory for most Israelis over the age of 18, with men serving three years and women two.