The entire cabinet reportedly submitted its resignation on Sunday, according to state TV.
At least 33 people have been killed as protesters demanding the military council make way for an interim civilian administration have clashed with security forces in Cairo's Tahrir Square.
TV footage showed tens of thousands of people continuing to demonstrate as news of the cabinet's resignation emerged. Apparently injured protesters could be seen being carried through the growing crowds to a makeshift field hospital.
The government expressed "deep regret over the painful events," cabinet spokesman Mohammed Hegazy said in a statement carried by the official MENA news agency.
"The government of Prime Minister Essam Sharaf has handed its resignation to the(ruling) Supreme Council of the Armed Force.
"Owing to the difficult circumstances the country is going through, the government will continue working" until the resignation is accepted, he said.
The resignation could derail parliamentary elections scheduled to begin on November 28, the first democratic step since President Hosni Mubarak stepped down in February after a violent crackdown on protests against his decades-long rule.
Sharaf was appointed after that but his government has come under criticism from Egyptians for its perceived inefficiency and its subordination to the military.
He has ignored numerous calls for his resignation in recent months, saying while his resignation would turn him into "a national hero," he would stick to the job in order to fulfill the goals of the revolution.
Power is not due to be fully tranferred from the military council some time in 2012 or 2013.
However, the protesters have accused them of trying to cling on by attempting to set out new constitutional principles that would keep the military permanently beyond civilian control.
Clashes have raged on and off since police used batons and tear gas to try to disperse a sit-in in Tahrir on Saturday.
Police attacked a makeshift hospital in the square after dawn on Monday but were driven back by protesters hurling chunks of concrete from smashed pavements, witnesses said.
The army said it had intervened in central Cairo only to protect the interior ministry, not to clear demonstrators from nearby Tahrir Square, whom it also offered to protect.
"The protesters have a right to protest, but we must stand between them and the Interior Ministry," said General Saeed Abbas.
The US said on Monday that it was "deeply concerned" about the violence but called for the parliamentary elections to go ahead as soon as possible.
White House spokesman Jay Carney said: "It's important that Egypt continues to move to make that transition to the democracy that the people of Egypt demanded. And, as a result of their demands, they ended a multi-decade dictatorship.
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