Portuguese Prime Minister Jose Socrates has resigned his post after the Portuguese parliament refused to back his Socialist Party's austerity budget of increase spending cuts and more tax rises.
The fallout of the impasse is likely to see an EU-mandated rescue package for the country similar to the austerty deals thrashed out for Ireland and Greece in 2010.
Portugal's debt crisis is worrying European markets.
"This political crisis has very grave consequences for the confidence Portugal needs from institutions and the financial markets," Socrates said.
Socrates presented his resignation to Portugal's President Anibal Cavaco da Silva.