After sacking Finance Minister Christian Lindner of the Free Democrats (FDP) party on Wednesday, Scholz is expected to head a minority government, either alone with his Social Democrats or with the Greens, the second-largest party, relying on cobbled-together parliamentary majorities.
The collapse of Scholz's three-way coalition caps months of wrangling over budget policy and Germany's economic direction, with the government's popularity sinking and far-right and far-left forces surging.
"We need a government that is able to act, that has the strength to make the necessary decisions for our country," Scholz told reporters.
Scholz said he fired Lindner for his obstructive behaviour on budget disputes, accusing the minister of putting party before country and blocking legislation on spurious grounds.
The move comes a day after the election of Republican Donald Trump as US president, with Europe scrambling to form a united response on issues from possible new US tariffs to Russia's war in Ukraine and the future of the NATO alliance.
The government crisis comes at a critical juncture for Germany, with a flatlining economy, aging infrastructure and an unprepared military.
A political shake-up could fuel growing frustration with Germany's mainstream parties to the benefit of younger populist movements, including the anti-immigrant Alternative for Germany (AfD).
With France also facing political uncertainty after snap elections this year, turmoil in the European Union's two largest economies could hamper efforts to deepen the bloc's integration at a time when it is facing challenges from east and west.
The coalition has been at odds over how best to rescue Europe's largest economy, which is facing its second year of contraction and a crisis in its economic model after the end of cheap gas from Russia after its 2022 invasion of Ukraine and amid increasing competition from China.
The FDP had proposed public spending cuts, lower taxes and less regulation as the answer to this malaise. It also wants to slow Germany's shift to a carbon-neutral economy.
The SPD and the Greens, while at odds on some issues, agree that targeted government spending is needed.
