Tully was appointed Deputy Leader of the Labour Party under Michael O'Leary in 1981, and Minister for Defence in the short-lived 1981–82 Fine Gael-Labour Party government. In that capacity he traveled to Cairo, in 1981, as Ireland's representative in Egypt's annual 6 October military victory parade. While in the reviewing stand, next to President Anwar Sadat, he suffered a shrapnel injury to his face when Sadat was assassinated by members of Egyptian Islamic Jihad who had infiltrated the Egyptian Army.