Laar announced his decision in a statement on the afternoon of Dec. 19, which caused stunned reactions across the country. He blamed his colleagues in the ruling coalition for destroying any chance of being able to work together.
"On being told the decision of the Reform Party taken behind its partners' backs to bring the Center Party to power in the capital, my first reaction has been to resign immediately," Laar wrote.
"Now that I am free in my decisions, I announce that I intend to step down at the next Cabinet session on Jan. 8, 2002."
All eight of Laar's advisers also quit their jobs, and if the prime minister falls so does his Cabinet.
In a news conference that followed his resignation, Laar said his successor, whoever it may be, would inherit an Estonia in good condition compared to when Laar became prime minister for the second time in 1999.
"It was one government and one job. Dividing responsibilities between political parties is dishonest," said Laar, adding that he thinks he did a good job as a prime minister.
"It's a little too early for me to write memoirs, but I will of course write something about my being prime minister. I like to write books," he said.
Speaking on the possible policies of the next government, Laar said it would be hard to turn back the political and economical processes launched by his own government. "The timetable is set," said Laar, referring to the evolving path to the European Union and NATO.
According to the constitution, if a prime minister steps down the president has two weeks to come up with a replacement candidate to be accepted by the Parliament. The current prime minister and his team continue to work until their successors are ready to begin.
He said he was pleased the Parliament had managed to make a number of positive decisions in December, given that the ruling partnership between Pro Patria Union, Moderates and Reform Party had already collapsed. Laar recently set a record for holding the prime ministerial hot seat, which is now up to almost three years.
The Reform Party and the Center Party completed their power shift in the capital a month ago and formed a new coalition. The Reform Party said that a 1.5 billion kroon ($88.2 million) loan planned by former Mayor Tonis Palts of the Pro Patria Union, Laar's party, for 2002 would be a crucial mistake for the whole country, and quit the City Council coalition, a copy of the national three-party union.
Toomas Hendrik Ilves, Estonia's foreign minister and Moderates' chairman, said on Jan. 7 that a government collapse was inevitable because of the current atmosphere of mistrust and interparty disagreement.
The board of the Moderates has assessed Laar's decision to resign to be the right one.
Ilves quoted Siim Kallas, head of the Reform Party and finance minister, as admitting that his party quit the coalition in accordance with its poor expectations for the next parliamentary elections, in March 2003.
"We obviously see the role of the state in two different ways," said a despondent Ilves.
Most observers see Kallas, 53, as being the main candidate for prime minister. The most probable development at the moment is that a two-party coalition of the Reform Party and the Center Party will come to power.
The Moderates regard their taking part in such a coalition unlikely. At an unofficial dinner on Jan. 7, Kallas, Laar, Ilves and Andres Tarand, head of the national coalition council and ex-chair of the Moderates, failed to reach a new compromise.
Kallas said after the dinner that Laar had confirmed his decision to step down. "Once again I appealed to Laar and Ilves to see reason and carry on, but in vain," said Kallas.
"There was no positive will to search for compromise at the meeting. Our partners practically signed the obituary of the three-party coalition," Kallas said.
Laar called this statement completely false. "When Toomas Hendrik Ilves and I asked Mr. Kallas why the Reform Party quit the Tallinn coalition, we heard only, 'Well, it happened like that,'" he complained.
Any partnership that involves the left-wing Center Party and the right-wing Reform Party is likely to be rived with disagreement. Although both agree on one vital issue - to stop the sale of the Narva power stations to the U.S. company NRG - they hold different economic views, for example on tax policy.
The Centrists have been proposing for several years to implement a progressive income tax, while the Reformists have come up with the idea of reducing income tax from 26 percent to 20 percent.