Social Democrat Prime Minister Stefan Lofven said he would hold emergency talks Tuesday evening with the centre-right opposition in an attempt to counter the move by the Sweden Democrats and avert a crisis.
Lofven came to power after the Sept. 14 elections as the head of a coalition with the Greens, promising to reverse many reforms by the previous centre-right government.
The Sweden Democrats, which made strong gains in the September election, said it would attempt to force the government to resign by siding with the centre-right opposition in the budget vote Wednesday.
The party, which has right-wing extremist roots, stands alone in Swedish politics in criticizing the country's liberal immigration laws. Despite efforts to soften its image, all other parties have refused to collaborate with the group.
Lofven on Tuesday said the four parties in the centre-right opposition group had a choice to either collaborate with the government in new negotiations about the budget or be prepared to govern Sweden with support from the Sweden Democrats, which they have previously promised they would not.
The Sweden Democrats "have acted in an exceptionally irresponsible manner," Lofven said, adding the party simply "aims to knock out any government that doesn't dance to their tune."
Sweden Democrats spokesman Mattias Karlsson said Sweden for long has had an "extreme immigration policy."
"That is what worries us Sweden Democrats the most," he told reporters.
In 2012, around 20 per cent of Sweden's 10 million inhabitants had foreign roots, including people from western countries, according to official figures. In recent years, immigrants have come mainly from Iraq, Poland and Afghanistan.
The Sweden Democrat's rejection of the budget was seen as a political breakthrough for the anti-immigration group, the country's third-largest party in the 349-seat Parliament.