"The conditions do not exist that allow us to cooperate with the Finns led by Halla-aho," Prime Minister Juha Sipila said on Twitter, referring to Jussi Halla-aho, who was elected new Finns Party leader on Saturday.
Sipila said he would submit his government's resignation to President Sauli Niinisto.
"First the parliamentary groups meet and then I will go to the president and tender the resignation of the government.
"I hope that much of the current government platform can be realised also in the new government," he told a news conference in Helsinki.
Sipila, a centrist, has governed together with the conservative National Coalition and the eurosceptic and anti-immigration Finns Party since May 2015.
If the government resigns, the president would give Sipila a mandate to try to form a new one.
The conservatives and centrists would then probably begin talks with potential partners, notably the Christian Democrats and the Swedish People's Party, which represents Finland's Swedish-speaking minority.
The two groups have already expressed interest in joining the government, and their policies are seen as close to those of the centrists and conservatives.
Veering right
A member of the European Parliament, Halla-aho has said he wants to steer the party further to the right and push his coalition partners to toughen their immigration policies.
But on Monday, both the centrists and conservatives refused point blank.
Hallo-aho held talks early Monday with Sipila and Finance Minister Petteri Orpo, the leader of the conservatives.
"I made it clear that the current government programme and the asylum policy action programme are sufficient for the Finns, but we expect that what had been jointly agreed with us will be closely followed," he said, something the government has so far refused to do.
"The prime minister announced a moment ago that the sections about immigration can't be complied with more strictly than currently, and that the conditions are not there for a continuation of a government cooperation," he added.
Orpo stressed that Halla-aho's history of hate speech made any collaboration impossible.
"Undeniable human dignity is the foundation of Western democracy, and a new position does not wipe out what has been written in the past," Orpo told reporters.
'Finland first'
Participating in the three-party coalition has come at a heavy price for the Finns Party.
Its support has almost halved from 17.7 percent in the May 2015 general election to 9.0 percent in a poll published Thursday by public broadcaster YLE.
Monday's developments mean Hallo-aho may get what he has appeared to want all along: to return his party to opposition.
Halla-aho, a 46-year-old father of five, is a former medieval language lecturer who complains that his party has been tainted by mainstream politics.
"The Finns Party leadership should prioritise issues in a similar way as our supporters seemingly do," Halla-aho said in May.
"Immigration policy and a kind of 'Finland first' mentality should have a stronger presence in our public output."
Halla-aho has seen his star rise in recent years, in part because of his explicit writings against immigration and Islam.
In 2012, Finland's highest court upheld a conviction and fines against him for inciting ethnic hatred and blasphemy in a 2008 blog post where he criticised Islam and made offensive remarks about Somalis.
Earlier this year, he demanded that the European Commission penalise civic organisations which rescue migrants from drowning when their ships founder in the Mediterranean.
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