Hard right and leftist MPs joined forces to back a no-confidence motion against Prime Minister Michel Barnier and his government, with a majority 331 votes in support of the motion.
Barnier was expected to tender his resignation and that of his government to President Emmanuel Macron shortly.
No French government had lost a confidence vote since Georges Pompidou's in 1962.
A majority of 331 MPs have backed a no-confidence motion in the government. (AP PHOTO)
This time, Macron had ushered in the crisis by calling a snap election in June that delivered a polarised parliament.
With its president diminished, France risks ending the year without a stable government or a 2025 budget although the constitution allows special measures that would avert a US-style government shutdown.
The MPs punished Barnier for opting to use special constitutional powers to ram part of an unpopular budget, which sought 60 billion euro ($A98 billion) in savings in an effort to shrink the deficit, through parliament without a final vote.
National Rally chief Marine Le Pen had said collapsing the government was "the only way the constitution gives us to protect the French from a dangerous, unfair and punitive budget".
France faces a period of deep political uncertainty that is already unnerving investors in French sovereign bonds and stocks.
Earlier this week, France's borrowing costs briefly exceeded those of Greece, generally considered far more risky.
Macron must now make a choice.
Three sources told Reuters that Macron aimed to install a new prime minister swiftly, with one saying he wanted to name one before a ceremony to reopen the Notre-Dame Cathedral on Saturday.
US president-elect Donald Trump is due to attend.
Any new prime minister would face the same challenges as Barnier in getting bills, including the 2025 budget, adopted by a divided parliament.
There can be no new parliamentary election before July.
Macron could alternatively ask Barnier and his ministers to stay on in a caretaker capacity while he takes time to identify a prime minister able to attract sufficient cross-party support to pass legislation.
A caretaker government could either propose emergency legislation to roll over the tax-and-spend provisions in the 2024 budget into next year, or invoke special powers to pass the draft 2025 budget by decree - although jurists say this is a legal grey area and the political cost would be huge.
The danger for Macron is that his opponents vote down one prime minister after the next.
His rivals say the only meaningful way to end the protracted political crisis is for him to resign, something he has hitherto shown little inclination to do.
