Fini described Berlusconi as "having not exactly a liberal concept of democracy" and trying to run a government as an autocratic chief executive, "which has nothing to do with our democratic institutions".
Standing behind the 58-year-old Fini were several parliamentarians who have agreed to join him in his party rebellion, calling their faction the Freedom and Future for Italy.
A parliamentary official later said they had 33 members in the lower house plus Fini, enabling them to deprive Berlusconi of a majority there.
They have 10 supporters in the Senate, which could reduce Berlusconi's majority there to two votes.
Fini said his fellow rebels would "loyally support the government every time it acts within the framework of the electoral programme, but will not hesitate to fight proposals that are unfair or damaging to the wider interest".
He did not mention the risk of early elections, which commentators said were now a real possibility.
In a tense string of events that climaxed on Thursday night, Berlusconi accused Fini of being a traitor and conspirator and trying to inflict a "slow death" to their party.
After months of tension and even open hostility between the estranged conservatives, Berlusconi's party issued a tough document censuring Fini, saying his actions and comments no longer reflected the ideals of the party he helped found.
The coalition, made up of the PDL and the Northern League, needs a majority of 316 in the lower house.
Before the split, it could count on up to 344 votes, including 14 from smaller parties who decide votes on an ad hoc basis.
But the new numbers could leave Berlusconi prey to the whims of tiny parties or even demands from the Northern League, which caused the collapse of his first government in 1994.
The situation caused by the de facto implosion of the centre-right is unprecedented, with no institutional guidelines on the sequence of steps over the next few days or weeks.
Fini, a former neo-Fascist, dissolved his own National Alliance party to merge it with Berlusconi's Forza Italia in 2009 after nearly 14 years of supporting him in three previous governments.
He has enraged the prime minister by hammering away at the theme of morality and legality in government, and insisting that officials implicated in judicial investigations should resign.
Commentators said if the political situation becomes untenable, Giorgio Napolitano, the president, could appoint an interim government to run business until new elections.
Such an administration was headed by Lamberto Dini, a former finance minister, in 1995 after the collapse of Berlusconi's first government.
The censure document, which was signed by all but three of the 36 members of the presidency of the PDL, rebuked Fini for positions it said were incompatible with the party line.
At his news conference, Fini listed the charges against him like a defendant in the dock and defiantly rejected each one.
Pier Luigi Bersani, the leader of the biggest opposition group, the centre-left Democratic Party, said Berlusconi should admit that his government was in a deep crisis and that the prime minister should address parliament.