While Labor's forebears established the country after its founding and reached peace treaties with Israel's neighbors, it's been almost two decades since the party won a general election.
On Monday evening, Gabbay, who switched to the center-left Labor party several months ago from Kulanu, a smaller center-right party, won the election to head the party, garnering 52 percent of the vote.
The first round of Labor primaries last week saw current party leader Isaac Herzog fall out of the running, with Peretz scoring 32 percent of the votes followed by Gabbay with 27 percent.
In a statement following the vote, Herzog - who had endorsed Peretz ahead of the runoff - congratulated Gabbay on his "impressive victory" and said he would stand by him "to help strengthen Labour and change the government".
In his victory speech, Gabbay promised "leadership that will act with courage and integrity toward peace with our neighbors" and to work toward replacing Netanyahu's Likud Party as the country's ruling party.
Gabbay, who can not be opposition head as he is not a member of parliament, asked Herzog to retain the position in his victory speech.
As a Kulanu minister in Prime Minister Benjamin Netanyahu's government, Gabbay was not outspoken on the Israeli-Palestinian conflict, traditionally a key topic for a contender of the leadership of one of Israel's largest parties.
Almost 59 percent of Labour's 52,505 members voted in the contest for leadership of the veteran party, which was seeking a new face to boost its standings in the polls.
They also both support a two-state solution to the Israeli-Palestinian conflict.
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He has just been trying to stay out of the political fray and doesn't like to get bogged down in media relations and interviews. Why did Mattis take a call with a high school student? War is "a fundamental and predictable phenomenon", Mattis told Fischer.
Gabbay is a political newcomer with a business background that supporters hope will galvanize his beleaguered party.
Gabbay, 50, is seen as fresh face, having formerly headed Israeli telecommunications firm Bezeq before joining politics. Zionist Union holds 24 seats in the 120-member parliament.
He was previously head of Labour from 2005-2007 and is the longest serving member of the Knesset, or parliament.
Opinion polls in the past week have shown that neither candidate, however, would be able to lift the party's slipping standing from third place behind Netanyahu's Likud and Yair Lapid's Yesh Atid.
His first stint as leader ended after he was accused of failing in his post as defence minister during the 34-day war against Lebanon's Hezbollah militia in 2006.
Peretz however later saw redemption due to his advocating of the development of the Iron Dome missile defense system, now seen as an indispensable part of Israel's military infrastructure.
Amir Peretz (R) and Avi Gabbay (L).
Labor MK and Gabbay supporter Stav Shaffir also offered her praise for the party's newly elected chairman, describing it as a fresh chance for the party.