The fall of the government in the EU country, just two days short of the coalition's third anniversary, all but guarantees that the 2,000 Dutch troops will be brought home this year.
The collapse, the fourth for a cabinet led by Balkenende in eight years, throws into doubt the scope and timing of planned budget cuts for next year as well.
I unfortunately note that there is no longer a fruitful path for the Christian Democrats, Labour Party and Christian Union to go forward, Balkenende, who leads the centre-right Christian Democrats, told reporters.
It followed more than 15 hours of talks and acrimonious exchanges throughout the week. Balkenende officially offered Queen Beatrix the resignations of the Labour ministers on Saturday morning, leaving the option open for a minority cabinet or a caretaker government until elections can be held.
Balkenende wanted to extend the Dutch deployment in Afghanistan past an August deadline, but Deputy Prime Minister Wouter Bos's Labour Party opposed any extension.
NATO had asked the Netherlands, among the top 10 contributing nations to the mission, to investigate the possibility of a longer stay.
NATO spokesman James Appathurai said NATO Secretary General Anders Fogh Rasmussen respected the Dutch discussion.
The Secretary General continues to believe that the best way forward for the mission would be a new smaller Dutch mission to consolidate the progress that the Dutch have made until now, and to help the process of transition to Afghan lead, he said.Abdullah Abdullah, a former Afghan foreign minister under Hamid Karzai, said in an interview he was concerned and disappointed with the Dutch government's collapse.
Parliamentary elections could be held mid-year at the earliest, but would probably be followed by months of talks between parties to form a government.
A new government may prove difficult to establish, with opinion polls suggesting four or five parties may be needed to secure a majority coalition in the 150-seat parliament.
We are in the middle of a financial crisis and holding elections now would lead to a lot of insecurity for the public and investors, said Andre Krouwel, professor of political science at Vrije Universiteit in Amsterdam. It is not the time to hold national elections.
Right-wing legislator Geert Wilders's Freedom Party, which has called for an end to the Afghan mission, could be the big winner at the next election. Opinion polls tip the party, campaigning on an anti-immigration ticket, to become the largest or second biggest party in parliament.
There are enormous problems in the Netherlands today, whether it's about crime, about mass immigration and Islam, or it's about high taxes, so I think it's a wonderful day and people can choose for the change in the policy of the Netherlands, Wilders told reporters in The Hague.
Labour could regain some much-needed electoral support by its stance over Afghanistan but that may not be enough to form a coalition. Bos was campaigning in Utrecht on Saturday for municipal elections due March 3.
AUSTERITY MEASURESThe collapse of Balkenende's coalition effectively nullifies an existing agreement to hold off any economic austerity steps until 2011 and could lead to deeper cuts in September's budget.
This week, the Dutch government's main think-tank raised its 2010 budget deficit forecast to 6.1 percent of gross domestic product but called for a 2011 deficit of 4.7 percent, implying that steep spending cuts will be needed.
That could crimp the Dutch economy, which just entered a recovery after four quarters of contraction. ID:nLDE61B0TN]
The Dutch corporate sector will feel the consequences of this for a long time. Internationally, we've suffered a loss of face, said Arie Visser, 77, a retiree who spent his Saturday at a bike repair shop reading a newspaper about the collapse.
The Dutch mission in Afghanistan, which started in 2006, is scheduled to end in August with the last of the troops leaving in December. Most are deployed in Uruzgan province.
A withdrawal will damage the reputation of the Dutch as a reliable partner that is willing and able to contribute to important military missions, said Edwin Bakker, a senior research fellow at the Clingendael Institute in The Hague.
(Additional reporting by Ben Berkowitz, Harro ten Wolde and Gilbert Kreijger in Amsterdam, Sophie Hardach in Paris, Svebor Kranjc in The Hague and Bate Felix in Brussels; Editing by Angus MacSwan)