The Netherlands’ Prime Minister, Jan Peter Balkenende, announced in parliament that his government would tender its resignation to the Dutch head of state Queen Beatrix, probably on Friday.
The reformist D66 is the junior coalition party with just three of a total of 25 ministers and junior ministers in government.
It unsettled Mr Balkenende's government when it withdrew its support in the row over Ms Verdonk's handling of the controversy surrounding the citizenship of Somali-born Islam critic and former parliamentarian Ayaan Hirsi Ali.
Ms Verdonk has been given the nickname of "Iron Rita" for her tough stance on immigration.
Ms Hirsi Ali admitted publicly that she lied about her name and birth date on her asylum application when she applied for Dutch citizenship.
Ms Verdonk ruled under the circumstances she could not keep her Dutch citizenship and would probably have to leave The Netherlands.
Ms Hirsi Ali, 36, gained international attention in 2004 after Dutch filmmaker Theo van Gogh was murdered by a Muslim extremist.
Van Gogh had produced a controversial film written by Ms Hirsi Ali about the treatment of women in Islam.
The resignation of the government is likely to lead to new elections in October.
Coalition possible
However, there is also a slim chance the coalition parties will try to cobble together a minority government supported by various small opposition parties.
After the D66 minister resigned, Ms Balkenende said the rest of the cabinet should hand in its resignation too.
After enormous political pressure from parliament Verdonk softened her hardline position on Ms Hirsi Ali.
On Tuesday she announced that Ms Hirsi Ali could keep her Dutch passport.
Ms Hirsi Ali has since stepped down as a member of parliament and said she was moving to the United States to work for a think tank.
Ms Verdonk used complicated legal reasoning to justify her turnaround, concluding that Ms Hirsi Ali actually lied about lying about her name because she could legally use the name Ali under Somali law.
The minister also produced a declaration signed by Ms Hirsi Ali in which she said that she was actually too the blame for the situation and wrote she did not reproach the minister anything.
However, Ms Hirsi Ali later told Dutch media that she signed the document under pressure because she wanted the affair to be over.
She said that she also needed a valid Dutch passport to complete her move to Washington.