The breakdown clears the way for the ruling Pakistan People's Party (PPP) of slain former Prime Minister Benazir Bhutto to tighten its hold on the government; the West hopes it will make good on pledges to combat terrorism.
Nawaz Sharif, another former premier, announced Monday that he was pulling the Pakistan Muslim League-Nawaz (PML-N) out of the 5-month-old alliance because of the coalition's failure to restore judges ousted by Musharraf or agree to a neutral replacement.
He blamed Bhutto's widower and political successor, Asif Ali Zardari, for the breakup, and named a retired judge to run against Zardari in the Sept. 6 presidential election by lawmakers.
However, government ministers from Zardari's party said the ruling coalition still had enough support from parties other than the PML-N to survive.
"The government is not in any imminent danger of collapse" said one ministerial source to CBS News' Farhan Bokhari, reporting from Islamabad.
However, Sharif vowed to play a "constructive" role while in the opposition.
"We don't want to be instrumental in overthrowing any government. We don't have any such intentions," Sharif told a news conference.
His move is not expected to trigger new elections.
There are warnings that this latest setback to Pakistan's ruling political order could take the south Asian country through a period of political turbulence and possibly undermine its focus in carrying out the war on terror, reports Bokhari.
"When you have a government which is politically split, obviously this is a matter of concern for the outside world," said one senior western diplomat in Islamabad, speaking to CBS News on condition of anonymity in his immediate response to the latest political developments.
The breakup caps a week of upheaval in Pakistan's political landscape.
Musharraf quit Monday, nine years after he seized power in a military coup, to avoid impeachment charges.
With their common foe gone, the coalition that drove him from office began immediately to fray over unkept promises to restore the judges and Zardari's decision to seek the presidency.
In a bid to demonstrate its determination to tackle that threat,in retaliation for the movement's claim of responsibility for Thursday's attacks.
However, the ban was more symbolic than real as the Taliban typically operate in the areas along the border with Afghanistan which is the focus of Pakistan's anti-terror campaign carried out by the country's military.
The minister who spoke to CBS News agreed that the ban will make no difference to the Taliban's activity but added that "the government wanted to demonstrate its clear and firm resolve in an otherwise difficult situation."