A day earlier a third party, the liberal Neos, walked away from the talks, blaming the other parties for failing to take the bold and decisive action it had called for.
"I will stand down as chancellor and as leader of the People's Party in the coming days and enable an orderly transition," Nehammer said in a video statement on X, after talks with the Social Democrats (SPO).
The collapse of the talks three months after September's parliamentary election underscores the growing difficulty of forming stable governments in European countries, such as Germany and France, where the far right is on the rise but many parties are loath to partner with them.
The eurosceptic, Russia-friendly FPO won that election with roughly 29 per cent of the vote. It would have needed a coalition partner to govern but Nehammer ruled out governing with FPO leader Herbert Kickl, meaning no potential coalition partner for the FPO was forthcoming.
Austrian President Alexander Van der Bellen, a former leader of the Greens, therefore tasked Nehammer with forming a government. Now that Nehammer is stepping down, the two most likely options are either that Kickl is tasked with forming a government or a snap election is called.
Nehammer has described Kickl as too much of a conspiracy theorist to lead a government but Kickl's party overlaps with Nehammer's on issues such as immigration.
The leadership of Nehammer's People's Party (OVP) was due to meet on Sunday morning to discuss who should succeed him. Whoever takes over is likely to be more open to a coalition with the FPO, which a large portion of the OVP favours.
The two parties governed in coalition under OVP leadership from 2017 until 2019, when the FPO's then-leader was felled by a video-sting scandal and that coalition collapsed.
Support for the FPO has grown since the last election. It holds a lead of more than 10 points over the People's Party and the SPO, opinion polls show.
That poses a dilemma for President Van der Bellen, who has expressed reservations about Kickl becoming chancellor.
SPO leader Andreas Babler confirmed at a news conference that the talks had collapsed, blaming Nehammer's party for seeking to skimp on pensions and salaries for teachers and police officers. Nehammer blamed the SPO for insisting on taxing wealth and inheritance, the SPO's flagship campaign policy.
"We know what threatens to happen now. An FPO-OVP government with a right-wing extremist chancellor that will endanger our democracy on many points," Babler said.
Kickl, who has consistently railed against the coalition talks and Van der Bellen's decision not to task him with forming a government, again likened those talks to the three-party "traffic-light coalition" in Germany which recently collapsed.
"Nehammer, Babler and Van der Bellen have also failed. They were the architects of the loser traffic light (coalition) and are now confronted with the ruins of their Kickl prevention strategy," Kickl said in a statement.
"Alexander Van der Bellen bears a significant share of the responsibility for the chaos that has arisen and the time that has been lost ... After today's events, he is under pressure to act."
