Medgyessy's replacement will be announced by the end of the week

Tensions arose between the prime minister and the Free Democrats (SZDSZ) over a government reshuffle.

Mr Medgyessy sacked three ministers on Wednesday, including the Free Democrat Economy Minister Istvan Csillag.

The Socialist party says it will name a replacement for Mr Medgyessy after talks with the Free Democrats.

"The Socialist party is committed to maintaining the coalition and to a successful government and therefore decided to use its right... to nominate a (new) prime minister," party president Laszlo Kovacs told a news conference.

The Free Democrats party said the dismissal of Mr Csillag had strained the coalition and shaken their confidence in Mr Medgyessy.

Mr Medgyessy had earlier threatened to resign unless he received a pledge of support from the Free Democrat party, saying it was impossible to govern amid such uncertainty.

The minister directing the prime minister's office, Peter Kiss, is widely tipped to be a possible successor.