In a long-awaited and dramatic session of the Bundestag yesterday, MPs voted against the government by 296 votes to 151 with 148 abstentions after Mr Schröder delivered a damning account of his coalition's inability to pursue his economic reform programme.
The vote of no-confidence, a tactic last employed by Mr Schröder's predecessor, Helmut Kohl more than 20 years ago, allows President Horst Köhler 21 days to decide whether to call an early general election, likely to be held on 18 September.
Opinion polls suggest that the opposition Christian Democrats are on course to oust Mr Schröder's coalition of Social Democrats and Greens and sweep Angela Merkel, the conservative leader, to power as the first female chancellor.
Looking pale and visibly distraught, Mr Schröder told the Bundestag that his government was in effect a lame-duck administration unable to pursue its policies at home, in Europe or abroad. "Without a new mandate my political programme cannot be carried forward," he said. "We need the support of voters to continue what has been begun."
The Chancellor's decision to call for a general election this autumn, a year earlier than planned, was prompted by the shattering defeat suffered by the Social Democrats last May in elections in the state of North Rhine-Westphalia.
Mr Schröder's party was ousted by the opposition conservative Christian Democrats for the first time in 39 years in the country's most populous state. The vote was widely seen as massive popular rejection of his attempts to reform Germany's sluggish economy and reduce the burden of 4.7 million unemployed.
The Chancellor provided an insight yesterday, into the shortcomings of his own Social Democrats, a party torn by arguments over his Agenda 2010 economic reform programme and filled with left-wing dissenters threatening to quit and join a new left-wing party.
"The defeat in North Rhine-Westphalia has led to heated debate within the party about its future course. It is simply come down to the question of whether the Agenda 2010 reforms are necessary at all or whether they should be revoked," he said.
"The steady confidence that I need to carry out my reforms is no longer present even within my own coalition government. Dissent and criticism of my policies are on the increase. This is a high price to pay for reform."
Mr Schröder's merciless portrayal of his own administration was welcomed by Mrs Merkel. She described his decision to call for an early election as " an unavoidable course of action which will spare months of tortuous debate".
Yet despite the gravity of the occasion, Germany's first prospective female chancellor managed to cause outbursts of laughter and jeers in the Bundestag after making a series of embarrassing slip-ups in her speech. Mrs Merkel's attempt to savage Mr Schröder for his "inability to rule effectively" came out as "I offer my respect for your ability" and was met by a chorus of laughter.
Her later attempt to say that her conservative CDU could govern more effectively became: "The CDU together with the SPD", earning more laughter, jeers and an ear-to-ear smile from an otherwise exhausted-looking Mr Schröder.
"Don't laugh too soon" was Mrs Merkel's retort.Reuse content