"The sanctity of life overrules the slogan of not giving up an inch," he added.
The ruling countered decrees by other rabbis, who declared that no Jew had a right to hand over any part of the biblical Land of Israel to a non-Jew for any reason.
But in recent years he appeared to retreat, emphasizing the religious and security aspects of the West Bank for Israel and backing Jewish settlement there.
The rabbi said during a sermon in August 2010 that Palestinian President Mahmoud Abbas should "perish from the world" and described Palestinians as "evil, bitter enemies of Israel."
He later apologized, and on Monday, Abbas expressed his condolences over Yosef's death.
It was not the only time Yosef's mouth got him into trouble. In 2007, he said that Israeli soldiers died in battle because they were not religious enough and said the victims of Hurricane Katrina in the U.S. suffered "because they have no God."
The author of dozens of books about Jewish law and practice, Yosef was a master of communicating with the masses. His weekly sermon packed his neighborhood synagogue. Overflow audiences listened outside on loudspeakers to his often earthy remarks, and in recent years the sermons were broadcast by satellite on television.
In matters of religion, he upheld the Sephardic tendency to blend ancient Jewish customs with modern developments — a contrast to the stringency of Ashkenazi ultra-Orthodox Jews. In one of his better-known rulings, he said that religious women may wear slacks.
Some of his attacks on opponents stirred controversy. He once said he eagerly awaited the day when he could dance on the grave of Shulamit Aloni, then head of the secular Meretz party.
With his flexible attitude toward the key issue of peace with the Arabs, Yosef was able to guide his party into nearly all of Israel's coalition governments over the past 30 years, winning hundreds of millions of dollars in government funding for Shas projects and institutions in exchange.
These schools and institutions gained hundreds of thousands of followers. But critics said the Shas welfare system created rifts in society and left many in poverty.
Shas was forced into the opposition this year amid a rising tide of opposition to draft exemptions historically granted to ultra-Orthodox seminary students. Shas has resisted attempts to change the system.
Born in Baghdad in 1920, Yosef was four years old when his family moved to Jerusalem. His exceptional abilities and rebellious nature emerged early, when he was still a student.
He chafed under the strict rule of his European rabbinical instructors, writing conflicting opinions based on Sephardic tradition while still a teenager. His insistence that Sephardic tradition is as valid as the European Ashkenazi version of Judaism spawned a religious and cultural awakening among Israelis from Arabic-speaking nations.
Yosef is survived by 11 children, including a son who is the current chief Sephardic rabbi of Israel, and dozens of grandchildren and great-grandchildren. His wife Margalit died in 1994.
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