There were a few big reasons for the opposition to the agreement, and some were tactical while others were moral.

On the tactical front, the state was still new and Irgun had been forced underground (and mostly disbanded). While Begin now headed a new political party, the domination of the state's political apparatus by the Labour Zionist movement led by Ben-Gurion made it virtually impossible to imagine Begin would ever get much political power. As a result, Menachem Begin was left looking for wedge issues that he could use to try and get a say in the new government, and reparations with Germany was one of them. The issue helped revive his party, which had fallen from 14 to 8 seats (of 120) in the Knesset in the 1951 elections, though ultimately Labour Zionists would continue to dominate the Knesset until Begin's "revolution" of 1977, when his party finally formed a coalition to lead the government.

The moral issues were of the sort that Begin had formed his entire party around, and were the sort that he had espoused his entire life through that point. I emphasize this because some might think that the moral arguments were just a "cover" for his tactical desires, but I think that's improper; Begin and co. truly believed many if not all of their arguments.

One of the arguments was opposition to the process. Begin found it shameful to be negotiating an agreement for reparations with Germany, believing that Germany should have virtually no say in the matter. His argument was that negotiations debased the claims of Holocaust survivors to 100% of their lost property, and also of the claims of family members who lost loved ones in the Holocaust. He believed that even if compensation could be adequately paid, which he conceded even might be impossible, it would be shameful to accept a negotiated agreement dictating the amount.

Another problem Begin and co. had with the agreement was the way it was going to be implemented. Begin believed that the proceeds should go entirely to Holocaust survivors, though some of the money would eventually go towards stabilizing the Israeli economy before it fell apart. Ben-Gurion viewed the stabilization as more important, given his view that Israel must be a bulwark against a future Holocaust and that a stronger Israeli economy could find ways to fund Holocaust survivors' livelihoods. Begin, on the other hand, viewed the payments of Germany to Israel as money that would be used for bulldozers, not payments to Holocaust survivors, and opposed the agreement on that basis as well, believing any payment that would reach Holocaust survivors and compensate those who lost family to the Holocaust would be insufficient.

Thus there was the tactical, the moral opposition to German negotiation, and the moral opposition to how the money was used, all coalescing into some opposition. Despite that, it passed the Knesset and was accepted in Israel, but not without plenty of acrimony and debate that continued even after the deal was agreed.