Leterme's Flemish Christian Democrat party won elections in June 2007, but has to rely on the Francophone Liberal Democrats and Socialists for support in the coalition.
His first attempt to form a government ended after 174 days, and he resigned as prime minister in December after failing to get the Francophone parties to commit to the devolution plan.
French speakers believe the shift in power to the regions would cut funding to Wallonia, the poorer soutern region, and the capital Brussels, which is bi-lingual.
The political wranging exposed deep divisions over the constitution reform plan.
In wealthier Flanders, more self-rule for the 6.5 million population is supported by all parties.
But politicians in Wallonia, with four million residents, accuse Dutch-speakers of trying to take over social security from the federal government, which would have a serious impact on the Francopjhone region.
They say any such move would mean the end of Belgium.
Laterme's resignation sparked protest marches by thousands of trade union members who accused politicians of failing to form a government and tackling rising food and fuel prices.
An opinion poll the following week showed the majority of Belgians want the 177-year-old state to remain intact.
In an effort to ease tensions, King Albert asked the out-going prime minister, Guy Verhofstadt to stay on and form an interim government, even though his party lost the June election.
|Guy Verhofstadt was asked to form an|
interim government [EPA]
He was tasked with dealing with economic and social issues which had remained unaddressed for six months.
Since then most political groups agreed to plans for only limited constitutional reform, clearing the way for a new agreement and for Laterme to try to form a new government.
Laterme's announcement follows months of debate and discussions and followed more all-night talks.
The five-party government plan includes promises on immigration, cutting taxes and improving pension benefits amid concerns that Belgium is facing for an economic slump.
However the plan does not include any move for constitutional reform; instead that issue will be handled by a special panel of lawmakers.