Conservative backbencher Cory Bernardi has informed the Senate he is quitting the Liberal party.
Senator Bernardi said he quit the party on Tuesday morning.
"I stand here today, both reluctant and relieved," he told parliament.
"Reluctant because this decision has weighed heavy on my heart, but relieved because whilst it is difficult, I believe it is the right thing to do."
Senator Bernardi said politics was failing the Australian people and a better way was needed.
The political class was out of touch he said.
He had warned for many years of the consequences of ignoring voters.
"The level of public disenchantment with the major parties, the lack of confidence in our political process and the concern about the direction of our nation is very, very strong."
"We will be united by the desire to create stronger families," he said of his new Australian Conservatives party.
"To limit the size and scope and reach of government while seeking to rebuild confidence in civil society."
It would give hope to those who despaired at the state of Australian politics, he said, acknowledging the journey ahead would not be for the faint-hearted.
Attorney-General George Brandis said the government was "disappointed" by the senator's decision.
"We believe that he has done the wrong thing," he told the chamber.
"Only seven months ago, Senator Bernardi was elected by the people of South Australia to serve in the Senate as a Liberal senator."
Senator Bernardi's defection was "perplexing" given Liberal party policies had not changed since he stood for election as a senator on July 2.
There was no need for him to quit the coalition because the Liberal party was a broad church that could accommodate his views.
"If one seeks to restore confidence in the political class, it is a poor way to begin by breaking the promise one makes to one's electors to serve for the political party on whose platform and whose ticket one stood," Senator Brandis said.
"What Senator Bernardi has done today is not a conservative thing to do.
"Breaking faith with the electorate, breaking faith with the people who voted for you, breaking faith with the people who have supported you through thick and thin for years and, indeed, decades is not a conservative thing to do."
The government expected Senator Bernardi to continue supporting government policies from the crossbench, given they were the policies he stood for when elected, Senator Brandis said.
Opposition Senate Leader Penny Wong said the "extraordinary" resignation showed the government was bitterly divided and coming apart at the seams.
"This resignation is a consequence of the failure of leadership by the prime minister," she said.