Guinea-Bissau's President Jose Mario Vaz has dismissed the government following a rift with Prime Minister Domingos Pereira.
The two men are said to have disagreed on a number of issues including the use of aid money and the return to Guinea-Bissau of a former army chief of staff.
The West African state returned to civilian rule in June last year.
With a history of coups, no elected leader has served a full term since independence from Portugal in 1974.
Many senior military officers have also been accused of turning the country into a narco-state as it a major hub for cocaine smuggled from Latin America to Europe.
BBC Africa's Zenaida Machado says the announcement follows weeks of tension between the president and the prime minister.
In a televised address, Mr Vaz said a simple reshuffle would not be sufficient to solve the problem.
"It is public knowledge that there is a crisis undermining the proper working of institutions," he said.
The UN Security Council has asked the leaders to resume dialogue.
Earlier in the week, Portugal warned that development aid could be at risk if the country slipped back into instability.
One of the dismissed ministers said that the consequences of the sackings were "unpredictable".
"If the state does not work, if people are in the street, we don't know what can happen," Angelo Regala, the former communications minister, told BBC Afrique.
The African Union representative to Guinea-Bissau, Ovideo Pequeno, said that the military was unlikely to get involved.
He told the BBC's Focus on Africa programme that top commanders had said they consider it a political issue, which was not their concern.