The surprise move came the day after outspoken Economy Minister Arnaud Montebourg condemned what he called fiscal "austerity" and attacked Eurozone powerhouse Germany's "obsession" with budgetary rigour.
In a terse statement, Mr Hollande's office said Prime Minister Manuel Valls had handed in his government's resignation, opening the way for a reshuffle just four months after it took office.
The statement said: "The head of state asked him to form a team that supports the objectives he has set out for the country."
It is believed Mr Valls would continue trying to revive the eurozone's second largest economy with tax cuts for businesses while slowly reining in its public deficit by trimming spending.
France has lagged other eurozone economies in emerging from a recent slowdown, fuelling frustration over Mr Hollande's leadership, both within his Socialist party and further afield.
The new cabinet will be announced today, and there was no immediate word on who would stay and who would go.
If Mr Hollande were to sack Mr Montebourg, who is viewed as a potential presidential rival, he would risk the ousted minister taking with him a band of rebel lawmakers and depriving Mr Hollande of the parliamentary majority he needs to push through reforms.
Opposition conservatives, who for weeks have been embroiled in their own leadership rows, called for an outright dissolution of parliament, as did the far-right National Front.
Former Prime Minister Francois Fillon, one of a handful of hopefuls for the conservative ticket in the 2017 presidential election, said: "With half of the presidential mandate already gone, it doesn't bode well for the ability of the president, or whatever government he chooses, to take key decisions."