Soon after the announcement, President Maithripala Sirisena sacked Prime Minister Ranil Wickremesinghe and appointed former President and Kurunegala district parliamentarian Mahinda Rajapaksa as the new Prime Minister.
Rajapaksa's return to power ends a more than three-year-old coalition government that was formed by Sirisena and Wickremesinghe on a promise to combat corruption and financial irregularities. Rajapaksa took the oath in front of President Maithripala Sirisena shortly after the Sirisena-led United People's Freedom Alliance (UPFA) withdrew from the national coalition government.
In a telephonic conversation with a TV station, Wickremesinghe said: "I will continue to be the prime minister".
Some 200 supporters, some carrying photographs of him, gathered outside Rajapaksa's home late on Friday to congratulate him.
The sudden development came after Sirisena's broader political front United People's Freedom Alliance (UPFA) announced that it has made a decision to quit the current unity government with prime minister Ranil Wickremesinghe's United National Party (UNP).
Sri Lanka was plunged in a constitutional crisis after Sirisena sacked Wickremesinghe and gave the job to former strongman leader Rajapakse, who was sworn in on Friday night.
The UNP claimed that President Sirisena sought to prorogue the parliament as 72-year-old Rajapaksa did not command a majority in the House.
It is reported that party members had expressed their displeasure over the conduct of the good governance government to Speaker Karu Jayasuriya yesterday evening.
Colombo was on the verge of facing economic sanctions from Western nations over Rajapakse's human rights record before his government lost office. "This is an undemocratic coup", Mangala Samaraweera, the finance minister of the outgoing government, said on his Facebook page.
Sirisena is also believed to have been behind a failed attempt to impeach Wickremesinghe in April. However, both the ruling parties suffered heavy defeats in the local elections in February.
Earlier this month, lawmakers passed legislation to pay compensation to victims of the civil war, but Rajapakse's supporters voted against the bill, arguing that it amounted to compensating separatist Tamil rebels.
Moreover, the former president is also accused of corruption on an epic scale, along with his inner circle.
Sirisena had pledged accountability for war atrocities, but has faced global criticism for being slow to deliver on justice.