Democrats leader Cheryl Kernot, whose party holds a key block of seats in parliament's upper house, said she was angry at the government's lack of vision and its failure to counter the populist drive of anti-immigration MP Pauline Hanson.
The government's obsession with its budget and its willingness to exploit the worst in people for political gain had done enormous damage to Australia's social fabric, she said.
Ms Kernot did not warn her party before she announced her decision, but the Democrats said it would continue to play a pivotal role.
The government said Ms Kernot's move was based on ambition, and an apparent leadership vacuum in the Labor party.
Opposition leader Kim Beazley said he was delighted that Ms Kernot would help in the renewal of the Labor party, which was rebuilding after being trounced in the March 1996 election after 13 years in power..Reuse content