His Flemish Christian Democrats, the Flemish Liberals and their French-speaking counterparts have held on-off negotiations for a record 174 days since the general election, but failed to agree on the key issue of devolving more power to the regions.
Leterme set a midday deadline for parties to accept his final plan. When one of them declined to do so, he went to King Albert to be discharged from his task of forming a government.
The political future of the country of 10.5 million is now
unclear with no obvious alternative coalition.
This will fuel speculation of a possible break-up of the linguistically-divided federal state, which is home to the European Union's main institutions and NATO. Leterme told reporters in parliamentthat the talks had made progress on socio-economic challenges but that clear agreement could not be reached on a vital state reform.
"I myself remain available to continue working towards solutions," he said. Talk of the 177-year-old country splitting into Dutch- and French-speaking parts has disturbed business leaders, who argue the deadlock will start driving away potential foreign investors and is already undoing a decade of budgetary discipline.