The Pakistan Muslim League-N vowed to vacate its nine posts in the 24-member Cabinet, threatening the coalition government's stability.
Nawaz Sharif, who leads the party, said he insisted that 57 supreme and high court judges, including Chief Justice Iftikhar Muhammad Chaudhry, be reinstated.
"We made a promise to the nation, we couldn't fulfill it, so we are quitting the Cabinet," Sharif said.
He added that the party would not join the opposition, and would continue to work with its partner, issue by issue.
Sharif said he does not recognize the judges appointed by Musharraf who now sit on the Supreme Court because he considered their appointments during the emergency rule to be illegal, the newspaper reported.