Livni entered politics and joined the Likud party. Her career was undoubtedly helped because she was the daughter of Irgun fighters. She was elected to the Knesset in 1999. After the Likud assumed power in 2001, Livni was appointed Minister of Regional Cooperation, and then was Minister of Agriculture and Rural Development, Minister of Immigrant Absorption and Minister of Housing and Construction.

She was awarded  the Abirat Ha-Shilton ("Quality of Governance") award for 2004. On  October 1, 2005, she was appointed Minister of Justice after several months acting in that position.

Livni was a key supporter of Ariel Sharon's Disengagement plan and was a leader of the "left wing" faction of the Likud party. Her political approach depends on compromise, and this has enabled her to score important successes. Tzipy Livni was instrumental in getting  Benjamin Netanyahu to support the disengagement process and ensured ratification of disengagement in the Knesset.

However, the Likud party soon split over the disengagement plan, and Livni, along with Ehud Olmert and others, joined the new Kadima Party founded by Ariel Sharon on November 20, 2005. On 20 November 2005, Livni followed Sharon and Ehud Olmert into the new Kadima Party. When Ariel Sharon was incapacitated by a stroke, Ehud Olmert became Prime Minister and Tzipy Livni became the number two leader in Kadima and the Israel government.

Before the elections of March 28, Tzipy Livni was appointed Foreign Minister in the transition government. She continued to serve as Justice Minister. The dual posts resulted from the resignation of Likud members. She was given the third spot on the Kadima Knesset list, ensuring her election to the Knesset in Kadima's massive victory in March 2006.  

On 4 May 2006, Livni became Deputy Prime Minister and retained the position of Foreign Minister, while resigning her post as Minister of Justice. Alone among leading government members, Livni escaped virtually unscathed from the massive wave of public criticism that followed the Second Lebanon War, She had led the quest for a diplomatic solution, though UN Secuirty Council Resolution 1701, obtained about a month of fighting, was not much different from the offer made by the Lebanese in the first week of the war. Critics of the resolution, which has allowed massive rearming of the Hezbollah have blamed Livni.

Though Livni has been sharply criticized by the Israeli right for advancing peace negotiations and willingness to compromise, her tenure as foreign minister and her style includes aggressive and repeated denunciations of terror as well as clear emphasis on the legitimacy of Israel and of Zionist ideology, and frank assertion of Jewish national rights. She is the first Foreign Minister in many years to take up these issues with such emphasis.

Against the background of the heavy criticism of Prime Minister Olmert for the poor performance of the government and the army during the war, Livni initiated moves to get Olmert replaced as Prime Minister. After these were quashed, she made her peace with Olmert. She was again appointed Justice Minister from 29 November 2006 to 7 February 2007. Forbes named Tzipi Livni the fortieth most powerful woman in the world. Livni was active in promoting the Annapolis peace talks and the opening of indirect peace negotiations with the Syrians.

In 2008, pressures to replace Ehud Olmert as Prime Minister mounted again, this time because of allegations he had conducted improper finances. On July 30, 2008, Olmert announced he would resign as Prime Minister (Jerusalem Post, July 30, 2008) and head of the Kadima party after Kadima had chosen another leader. Primary elections were scheduled for September 17.

Pre-election opinion surveys had indicated that Livni enjoyed a safe lead over rival Transportation Minister and former Defense Minister and IDF Chief of Staff, Shaul Mofaz, and exit polls seemed to confirm a decisive victory. But Mofaz and his team had worked diligently, organizing massive organizational registration for Kadima. The final tally showed Livni winning by a small margin of about 1% of the approximately 30,000 votes cast. Critics pointed out that the Prime Minister of Israel had been chosen, in effect, by a very small number of people.

If Livni succeeds in forming a new government, she will be Israel's second female Prime Minister, after Golda Meir.