Czech Prime Minister Bohuslav Sobotka has said that his government will resign, in a surprise move amid an escalating row over the business dealings of his finance minister and political rival, Andrej Babis.

The announcement on Tuesday reflects tensions in the country's ruling coalition six months before a parliamentary election that Sobotka is expected to lose.

Sobotka said there are suspicions that Babis, the country's second richest businessman, avoided paying taxes in the past. The billionaire politician has dismissed any allegations against him as "lies or half-truths".

"I will shortly present my resignation to President Milos Zeman. It is unacceptable for Andrej Babis to stay on as finance minister," he said.

The president plays a key role in a crisis like this one because he has a right to select a new prime minister.

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Sobotka's leftist CSSD party took power in 2014 in a three-member coalition government, which included Babis' centrist ANO.

Babis is riding high in opinion polls, with ANO scoring 33.5 percent support compared with just 16 percent for Sobotka's CSSD, according to a survey conducted by the CVVM pollsters in April.

The finance minister has insisted that Sobotka's move to question his business dealings is part of the "political battle" before the October 20-21 general election.

Babis and the presidential office did not immediately comment on Sobotka's announcement.

Last week, Sobotka asked Babis to clarify his past use of some 55 million euro-worth ($60m) of tax-free bonds in connection with Agrofert, a sprawling conglomerate that he ran before putting his assets into a trust earlier this year to ward off conflict of interest allegations.

Sobotka said on Tuesday that he could fire Babis, but that would mean his rival would be given extra time to campaign before the upcoming vote.

"That's the reason I'm opting for the only reasonable solution which is available, and that's the government's resignation," he said, adding: "A trust of the public in politics is at stake."

Sobotka and his cabinet's resignation will give the coalition a chance to form a government again, but without Babis. Another option is for parliament to call early elections.

But political analysts in Prague told the AFP news agency that an early election was unlikely to be called during the summer, pointing instead to the possibility of a minority caretaker government being installed until the October ballot.