Sweden's minority, centre-left government teetered on the brink of collapse after just two months in office when a far-right party announced it would vote against the 2015 budget, effectively dooming it to defeat.
The anti-immigration Sweden Democrat party, which holds the balance of power in parliament, said on Tuesday it would support an alternative budget proposed by the centre-right Alliance opposition bloc, leaving the government isolated.
Prime Minister Stefan Lofven said last-ditch talks with Alliance leaders to resolve the crisis sparked by the unaligned Sweden Democrats, who want to cut the number of asylum seekers by 90 percent, had proved fruitless.
"There is no one on the other side of the table, it is meaningless to hold talks," Lofven told reporters after the meeting at the government headquarters, saying he would decide how to proceed after Wednesday's debate in parliament.
"We may call snap elections later, when the constitution allows. We could also resign and there are other alternatives," he said.
The leaders of the Moderate, Centre, Christian Democrat and Liberal parties, which make up the Alliance, said they would not budge from their pledge to vote for their own bill.
It is tradition in Swedish politics that the main opposition party or parties put forward a shadow budget to rival the government's proposition.
On Wednesday one rival budget is being submitted by the Alliance and the Sweden Democrats will submit another.
It is expected that the Sweden Democrats' budget will be rejected immediately but with that party voting for the Alliance's proposal in a second round of voting, the Alliance's package is likely to get more support than the government's.
The budget by the ruling coalition, formed by Social Democrats and the Green Party, would partly reverse tax cuts implemented by the Alliance during their 2006-2014 reign.
Parliament is due to vote on the budget on Wednesday.
One of Lofven's options to salvage the crisis is to send the budget back to committee for amendments to try to win backing from some or all centre-right parties, though prospects of success are remote.
He could also resign and try to put together a new government - potentially without the Greens.
A last resort would be to call a snap election - something that has not happened since 1958. A vote could be called in late December at the earliest, with the elections taking place within the following three months.
Acting Sweden Democrat leader Mattias Karlsson said his party was flexing its muscles to force a reversal of Sweden's generous stance on immigration.
"If the Alliance doesn't change its policies [on immigration], we would try to bring down a government of those parties too," he said.
Costs for asylum seekers including housing, language lessons and welfare allowances totalled 1.5 percent of the country's 2013 budget, with Sweden the biggest per-capita recipient of asylum seekers and refugees last year, according to the Organisation for Economic Co-operation and Development.
The Sweden Democrats doubled their support in the September election, taking 13 percent of the vote and becoming the third largest party in parliament.
Mainstream parties have shunned them, and the budget gives them a rare opportunity to show their political strength.
Source: Al Jazeera and agencies