Labour narrowly won a second term in a September election, but the result has left it reliant on four small left-wing parties to pass the budget.
"The group of parties that the Labour Party depends on is a very diverse group," Johannes Bergh, a political scientist at the Oslo-based Institute for Social Research, told Reuters. "It's always been clear, since the election, that it would be very difficult for all those five parties on the centre-left to get to an agreement over a budget."
Two issues had led to a breakdown in talks. First, the Socialist Left party's (SV) demand that Norway's $2 trillion sovereign wealth fund, the world's largest, should divest from all Israeli companies, a demand that Labour had refused. That refusal stood following talks that concluded early on Wednesday.
"We can only apologise. We have turned over every stone and fought hard, but we lost the battle for the oil fund," SV leader Kirsti Bergstoe said in a statement.
The other issue was the Green Party's demand for a gradual phaseout of the oil industry by 2040. Norway is Europe's top gas supplier and a major oil exporter. That will not happen either.
"This government wants to develop, not dismantle (the oil industry)," Stoere told parliament on Wednesday.
Instead, the government will appoint a commission that will assess different scenarios and measures to improve the Norwegian economy's ability to adapt as oil and gas production declines. Oil and gas production is the Nordic country's top industry.
(Reporting by Terje Solsvik and Gwladys Fouche; Editing by Aidan Lewis)