A judge publicly read the constitutional court's order that the Chart Thai Party is to be disbanded and its leaders barred from politics for five years.
Tuesday's ruling followed court findings that the main coalition party, the People's Power Party, Chart Thai and another partner violated election laws.
The verdict removes Prime Minister Somchai Wongsawat from office. It is not clear if that will satisfy the demands of anti-government protesters, who have blockaded two of Bangkok's airports for a week.
Although they sought Mr. Somchai's ouster, the protesters may be angry that PPP members plan to shift to a new party, allowing the coalition to retain power.
Supporters of Mr. Somchai and his brother-in-law, former Prime Minister Thaksin Shinawatra, say they will resist the ruling, which they call a judicial coup.
Shortly after the ruling, the government postponed a summit of Southeast Asian leaders, which was to start December 15.