The Andhra Chief Minister's Telugu Desam Party (TDP) is also likely to move a no-confidence motion against the government in parliament, deciding against playing second fiddle to rival Jaganmohan Reddy, which submitted notice for such a motion on Thursday.
The TDP has 16 members in the Lok Sabha.
Last week the TDP pulled its two ministers out of the central government but had stopped short of walking out of the alliance.
While the BJP had been expecting the announcement while keeping up efforts to placate its largest ally in the south, the announcement delivers a huge psychological blow on the back of its setback in bypolls in Uttar Pradesh and Bihar.
Yesterday, Mr Naidu addressed his party parliamentarians in Delhi through teleconference and reportedly said Wednesday's bypoll results in Uttar Pradesh and Bihar reflected an anti-Modi and anti-BJP wave.
The Chief Minister had told his lawmakers that the BJP was trying to do a Tamil Nadu in Andhra Pradesh, using both Jagan Reddy and Jana Sena boss Pawan Kalyan against the TDP.
Later in parliament TDP lawmakers raised loud protests, forcing the Rajya Sabha to adjourn twice.
Mr Naidu has been furious with the centre for not granting special category status to Andhra Pradesh as promised after Telangana was carved out of it in 2014. Special status would mean a large infusion of central funds to help with the state government's plans to develop its new capital Amravati.
Mr Naidu was more upset after Pawan Kalyan, at a public meeting in Mangalgiri on Wednesday, focused all his criticism on the TDP and the chief minister. Mr Kalyan directly accused Mr Naidu's son Nara Lokesh, who is a minister in Andhra Pradesh, of corruption.
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Mr Kalyan also accused the chief minister of having struck a deal with the BJP, agreeing to a special financial package instead of insisting on special category status to Andhra Pradesh.The centre had turned down Mr Naidu's demand for special category status to Andhra Pradesh saying the nomenclature had been done away with, except for hill states and states in the Northeast. But Finance Minister Arun Jaitley had promised the state funds equivalent to what a special category state gets.