The dissolution of the Cabinet, which included a mass resignation by ministers, is a concession to opposition leaders. The government seeks their support to pass broad economic reforms insisted upon by international lenders whose billions are keeping Pakistan afloat.
"The prime minister has dissolved the cabinet after receiving resignations from the ministers, and it has been done to further reduce the size of the Cabinet," said Farahnaz Ispahani, spokeswoman for the ruling Pakistan People's Party. She added that the move aims for "fiscal austerity."
Pakistan's economy relies heavily on loans from the International Monetary Fund and the government has struggled to raise revenues, in part because many residents avoid paying taxes. Chronic power shortages have hampered economic growth and floods last year caused massive damage to infrastructure.
But the ruling party's efforts to impose new economic policies have been rebuffed by the opposition and even some allies. Analysts say shrinking the Cabinet - along with other concessions - could help the People's Party appease other groups and ultimately gain their support for economic reforms.
The People's Party announced last week that the Cabinet would be dissolved, though it has insisted the move has nothing to do with opposition demands. Prime Minister Yousuf Raza Gilani is expected to announce a new Cabinet in the coming days.
It was not clear exactly how many members a new Cabinet would have, or whether any of the faces would remain the same. Key ministries such as foreign and interior are likely to stay intact, though positions such as the minister for postal services might be cut.
Also Wednesday, officials said rival Sunni and Shiite communities in an area close to the Afghan border agreed to end a four-year conflict that claimed hundreds of lives.
Waris Khan Afridi, the head of a tribal council, said the two sects in Kurram region agreed to stop fighting for the benefit of their communities.
Taliban militants have reportedly aided the Sunni sect in Kurram. Tribesmen have also reported that an Afghan militant group blamed for attacks in Afghanistan had cut a deal with the Shiites so they could use Kurram as a staging ground.
It was unclear how the agreement would affect those dynamics. A local Pakistani Taliban commander, Fazal Saeed, welcomed the deal. He said his fighters would help enforce it - a possible sign they had emerged a strong force after the fighting there.
Elsewhere in the northwest, a remote-controlled bomb exploded next to a cattle market in the town of Charsadda, killing one person and wounding three others, police official Liaquat Ali Khan said.
Associated Press writers Riaz Khan in Peshawar, Babar Dogar in Lahore and Hussain Afzal in Parachinar contributed to this report.