The President's sacking of his popular Prime Minister, Yevgeny Primakov, and the cabinet leaves Russia paralysed at a time when it is trying to reassert its diplomatic influence on the world stage by negotiating an end to the war against Yugoslavia.
Mr Yeltsin's decision, which was widely condemned in Moscow, poses fresh doubts over Russia's ability to broker a diplomatic solution to the Balkan crisis.
These doubts deepened with a threat from Mr Yeltsin yesterday to pull out of the peace process if Russia's views were overlooked.
Shortly after firing his Prime Minister, Mr Yeltsin declared that "some people" - a reference to Nato and the United States - "obviously aren't understanding our repeated proposals".
Central among these are a UN-sanctioned peace-keeping force in Kosovo and an end to the bombing campaign to allow peace talks to begin.
His comments coincided with complaints from the head of the Security Council, Vladimir Putin, that Russia - whose envoy, Viktor Chernomyrdin, has shuttled from Washington to Belgrade and Peking in recent days - was tired of playing the role of courier in the dispute.
Moscow's latest crisis and fresh unease over Kosovo overshadowed a visit to Moscow by the US Deputy Secretary of State, Strobe Talbott. Talks between Mr Yeltsin and President Jacques Chirac of France, who is due in Moscow today, seem likely to suffer a similar fate.
Matters have been complicated by the fact that although Mr Chernomyrdin should remain in his post as the Russian President's representative on Yugoslavia, the Foreign Minister, Igor Ivanov, is a Primakov loyalist. His future is now in doubt.
Having sought to grab the centre-stage in the Kosovo negotiations, Mr Yeltsin faces the daunting task of trying to combine weighty foreign duties with a snowballing crisis at home.
Although Mr Primakov was seen as anti-Western, his departure is unlikely to make it easier for the West to work with Russia. Officially, Western governments yesterday insisted the sackings did not affect the Kosovo diplomatic drive. But there were private concerns that the crisis may put pressure on a weakened Mr Yeltsin to take a harsher line against Nato, to appease pro-Serb public sentiment at home. His erratic behaviour, which recently caused his aides to suppress broadcasts of a rambling attack on US policy in Kosovo, is an additional cause of anxiety.
The sackings have produced a head-on confrontation between Mr Yeltsin and a hostile parliament which is likely to suspend effective government for weeks as the two sides haggle over a new prime minister. The lower house, the Duma, is today scheduled to begin a three-day debate on impeachment charges against Mr Yeltsin.
In a 10-minute national television address, Mr Yeltsin said the firing was a "difficult decision", brought about by Mr Primakov's failure to revive Russia's wasted economy and implement market reforms.
However, his choice of acting premier - Sergei Stepashin, his loyal Interior Minister - suggests other reasons lay behind the decision.
The 47-year-old Mr Stepashin, who was one of those behind Russia's disastrous decision to enter the Chechen war in 1994, does not have an economic background. Nor does Nikolai Aksyonenko, 50, the obscure railways minister whom the President yesterday appointed as First Deputy Prime Minister - one of the most senior government jobs.
Speculation in Moscow suggested that Mr Aksyonenko would be nominated by Mr Yeltsin as his second choice, if - as seems likely - the parliament refuses to confirm Mr Stepashin.
The firings will damage Russia's economy. They seriously jeopardise a $4.5bn (pounds 2.8bn) loan from the International Monetary Fund and will further discourage investment in the battered Russian economy. "This is very bad news for Russia," said Tim Ash, an economist at Westdeutsche Landesbank Girozentrale AG. "It just underlines the fact that Boris Yeltsin is now a liability."
Many commentators in Moscow linked the firing of the government - the third to go in just over a year - to moves by the Duma to impeach Mr Yeltsin on five counts.
However, the sacking has only increased the possibility that the 450- member Communist-dominated house will raise the 300 votes needed to begin proceedings.
Even if it does so, impeachment is a long process, which will have to wind through the upper house and constitutional and supreme courts. Mr Yeltsin is expected to survive.
At home, there were angry protests from all but a handful of pro-Western liberals who regarded Mr Primakov as too pro-Communist. The Communist leader, Gennady Zyuganov, accused Mr Yeltsin of deliberately creating a political crisis and said party officials would begin organising nationwide protests. The Duma, in a symbolic gesture, voted overwhelmingly for Mr Yeltsin's voluntary resignation.Reuse content