The Constitutional Court disbanded premier Somchai Wongsawat's majority People Power Party and two of its coalition partners on Tuesday, a week after anti-government demonstrators shut down Thailand's main airport.
Protesters say they will now end the movement they started seven months ago and lift the airport siege.
Mr Thitinan Pongsudhirak, a political analyst at Bangkok's Chulalongkorn University, told AFP that the court ruling effectively 'eliminated now almost a generation of Thai politicians.'
Supporters of the three disbanded parties will also be furious with the verdict, he said, possibly stoking tensions in the kingdom.
The three parties were banned after party executives were stripped of parliamentary seats for vote fraud during elections in December 2007 - the first polls since premier Thaksin Shinawatra was ousted in a 2006 coup.
Thaksin's enemies in the People's Alliance for Democracy (PAD) have been battling the government since May, accusing it of being his puppet and taking the protests to new heights with the airport blockades.
Rival pro-government protesters have taken to the streets in recent days, and grenade attacks on PAD protest sites by unidentified groups have so far claimed three lives.
The court verdict marks the political demise for Thaksin's brother-in-law Somchai, who quickly said he accepted the ruling, but it will not necessarily bring down the government.
All executives of the dissolved parties are now banned from politics for five years, but there are hundreds of parliamentarians who can continue with their functions, provided the ruling coalition hangs together.
For the government to survive, lawmakers from banned parties who are not executives must move to new shell political parties and then call a parliament session to nominate a new prime minister.
This has been tentatively scheduled for early next week.
Mr Chris Baker, who has written a number of books on Thai politics, warned that the situation could flare up again if the protesters disapprove of the choice of new premier.
'He would face almost exactly the same problems very quickly,' Mr Baker said.
'Then I think the army would move.'
Relations between the current government and the military are at an all-time low. The army chief made it clear that he did not want the PAD protesters at the airport forcibly removed for fear of bloodshed.
Protest leaders have already warned that they will quickly reactivate their campaign if they are not happy with the incoming government.
'PAD is ready to take to the streets if people from the Thaksin regime return,' the movement's founder Sondhi Limthongkul said in a statement.
Mr Thitinan said earlier that his greatest fear was that the 'extremely angry' government supporters would clash with rivals in the PAD.
PAD protests represent a deeper, long-running divide in Thai society between supporters and detractors of Thaksin.
The movement's backers include elements in the military, bureaucracy and the palace, who despised Thaksin because of his popularity with the rural poor.
The divide is also geographical, with Thaksin still wildly popular in the north and northeast, while Bangkok's middle classes and people in the south appear desperate to purge Thailand of his influence.
Mr Giles Ji Ungpakorn, a political analyst also at Chulalongkorn, called Tuesday's ruling a 'judicial coup d'etat' and said it showed an increasing willingness for the courts to wade into politics.
'It's not going to solve the problems,' he told AFP. 'It really shows that the elite are lining up against the government and the majority of the electorate.' -- AFP