The Tunisian parliament on Friday voted 134 to 72 against Prime Minister-designate Habib Jemli's proposed government.
Jemli's failure to win the confidence vote means the North African country must restart a complex coalition-building process.
Jemli, an independent candidate, was nominated by the Islamist Ennahdha party, which came first in the October 2019 legislative polls but failed to secure a majority in the 217-seat parliament.
The proposed government had included independent figures, who Jemli said were best suited to initiate urgent reforms to tackle the worsening economic crisis in the country.
President Kais Saied now has 10 days to appoint a new prime minister, who needs to get approval for his government from the parliament.
Youssef Chahed will continue as a caretaker premier until a new government is approved.
If the impasse continues, the president can call fresh elections.
Economic instability
Tunisia has been in a state of turmoil since former dictator Zine El-Abidine Ben Ali's regime was overthrown in a mass upheaval in 2011.
The country needs urgent economic reforms after successive governments struggled to tackle unemployment and inflation.
Tunisia is also dealing with a large influx of refugees from neighboring Libya, as an increasing number of people are fleeing the war-ravaged country.