French PM Manuel Valls has submitted the government's resignation to President Francois Hollande and has been asked to form a new cabinet.

The government was badly shaken on Sunday by criticism over its handling of the economy by economy minister Arnaud Montebourg.

Moments after Mr Valls's resignation Mr Hollande issued a statement.

He asked Mr Valls to set up a new cabinet "consistent with the direction [Mr Hollande] has set for the country".

The prime minister had accused Mr Montebourg of "crossing a yellow line" after the economy minister had attacked austerity measures which he said were strangling France's growth.

Mr Montebourg told a meeting of Socialists in eastern France that the time had come to put up a "just and sane resistance" to the "excessive obsessions of Germany's conservatives".

Francois Hollande is sending a clear message: that dissenters within the party will not be tolerated at this difficult economic moment.

But the decision to dissolve the government is also a sign of how much is at stake for him.

With unemployment running at more than 10%, growth stagnant, and polls suggesting that less than 20% of voters think he can turn the economy around, Mr Hollande is facing a difficult autumn.

His plan has been to cut spending in order to fund tax cuts for business, in the hope of boosting the economy, but there are those in his party who disagree.

They want less focus on austerity, and more money funnelled direct to households. Purging the rebels is an eye-catching move, but with his popularity at an all-time low, Mr Hollande cannot afford to look weak.

On Saturday, Mr Montebourg told Le Monde newspaper that Germany was trapped in an austerity policy that it imposed across Europe".

He was backed up by education minister Benoit Hamon and appeared to have the support of culture minister Aurelie Filippetti, too.

Mr Hamon called on Sunday for a revival in demand and for an end to German Chancellor Angela Merkel setting Europe's direction: "You can't sell anything to the French if they don't have enough income," he said.

Manuel Valls became prime minister in March after a poor performance by President Hollande's Socialist party in local elections.

Earlier this month, the French government admitted it would be impossible to reach a previous growth forecast of 1%. Germany saw its economy shrink by 0.2% between April and June.

Mr Montebourg told French radio shortly before Mr Valls announced the government's resignation that he had no regrets about his remarks, "first of all because there's no anger".

There was no debate about authority, he told Europe 1 radio, but a "debate about economic direction".

(BBC)