French PM Manuel Valls has submitted the government's resignation to President Francois Hollande and has been asked to form a new cabine, reports GNN based on BBC.
The government was badly shaken on Sunday by criticism over its handling of the economy by economy minister Arnaud Montebourg.
Moments after Mr Valls's resignation Mr Hollande issued a statement.
He asked Mr Valls to set up a new cabinet "consistent with the direction [Mr Hollande] has set for the country".
The prime minister had accused Mr Montebourg of "crossing a yellow line" after the economy minister had attacked austerity measures which he said were strangling France's growth.
Mr Montebourg told a meeting of Socialists in eastern France that the time had come to put up a "just and sane resistance" to the "excessive obsessions of Germany's conservatives".
Francois Hollande is sending a clear message: that dissenters within the party will not be tolerated at this difficult economic moment.
But the decision to dissolve the government is also a sign of how much is at stake for him.
With unemployment running at more than 10%, growth stagnant, and polls suggesting that less than 20% of voters think he can turn the economy around, Mr Hollande is facing a difficult autumn.
His plan has been to cut spending in order to fund tax cuts for business, in the hope of boosting the economy, but there are those in his party who disagree.
They want less focus on austerity, and more money funnelled direct to households. Purging the rebels is an eye-catching move, but with his popularity at an all-time low, Mr Hollande cannot afford to look weak.