The DMK party's 18 MPs will not support the Congress party-led government. Five MPs who are ministers in the government will also resign from the cabinet.
A senior minister said the government was "stable" and would remain in power.
The DMK is the main opposition party in the southern state of Tamil Nadu which has a large population of Tamils.
DMK chief M Karunanidhi has demanded that the Congress-led United Progressive Alliance (UPA) government pass a resolution in parliament condemning alleged atrocities committed by Sri Lankan forces against Tamils during the island's long civil war.
He has also protested against the Indian government's position on a resolution on alleged war crimes in Sri Lanka which is before the United Nations Human Rights Council - he wants India to push for stronger language in the resolution, including the use of the word "genocide".
"The issues raised by the DMK haven't been addressed by the Congress, thus this is a government that doesn't benefit the Tamils in any way," Mr Karunanidhi, told a press conference in Chennai (Madras) on Tuesday.
"And even after this, if we continue to extend our support to the government, it is a shame to Tamil Nadu... Thus the DMK has decided, and we are announcing our immediate withdrawal from the central government and the UPA," he said.
"India, despite being the biggest democratic country, hasn't addressed the issues raised by the DMK, and they have chosen to ignore the problems of the Tamils. These are completely anti-democratic acts by them. I totally condemn it," Mr Karunanidhi said.
Immediately after Mr Karunanidhi's press conference, the government said it still had a majority in parliament.
Finance Minister P Chidambaram, who met Mr Karunanidhi on Monday night to try talk him round, said there was no crisis and the "government is absolutely stable, it will stay in power".
Mr Chidambaram said the government was deciding its position on the UN vote and was consulting its allies on a resolution by parliament.
The government, which needs 271 MPs to stay in power, still has the support of at least 280 MPs. Elections are due next year.
Correspondents say there is no immediate threat to the government, but the DMK pullout will make it more difficult for it to pass legislation - the Congress party is dependent on several regional allies for support in parliament.
The government lost another important ally - the Trinamool Congress party of West Bengal - last September which pulled out over the government's plan to open the retail sector to global supermarket chains and other reforms.
Source: BBC News
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