Dutch Prime Minister Mark Rutte's government has resigned over a child benefits scandal, threatening political instability as the country battles the coronavirus pandemic.

Thousands of parents were wrongly accused by Dutch authorities of fraudulently claiming child allowance, with many of them forced to pay back large amounts of money and ending up in financial ruin.

The fact that some parents were targeted for investigation by tax officials because they had dual nationality also underscored long-standing criticisms of systemic racism in the Netherlands.

Mr Rutte - one of Europe's longest-serving leaders, having been in power since 2010 - said the cabinet would stay on in a caretaker role to oversee the response to Covid-19 until elections in mid-March.

"The buck stops here," he told a press conference after a crisis meeting of his four-party coalition cabinet in The Hague.

"We are of one mind: if the whole system has failed, only joint responsibility can be borne. And that leads to the conclusion that I have just now offered the king the resignation of the entire cabinet."

He added: "The rule of law must protect its citizens from an all-powerful government, and here that's gone terribly wrong."

Mr Rutte defended the decision to resign when the Netherlands is fighting the coronavirus pandemic, with the country facing a surge in cases of a new variant first found in Britain.

"Our fight against coronavirus continues," he said, adding that the caretaker cabinet would "do what is necessary in the interests of the country."

Polls say his Freedom and Democracy Party would likely come first in the next elections, putting Mr Rutte in line for a fourth term since 2010.

A hard-hitting parliamentary investigation in December said civil servants cut off benefits to thousands of families wrongly accused of fraud between 2013 and 2019.

Many were required to pay back benefits totalling tens of thousands of euros. Reports said several couples had split up as a result of the strain.

Pressure had been mounting on Mr Rutte to resign over the scandal, with the government facing a possible confidence vote.

The clamour grew after opposition Labour party chief Lodewijk Asscher, who was social affairs minister in Mr Rutte's previous cabinet, resigned yesterday over the scandal.

Dutch far-right leader Geert Wilders, known for his strong statements against immigration and Islam, said it was "right" that the government had quit.

"Innocent people, were criminalised, their lives destroyed," Mr Wilders said on Twitter. "It is not credible that officials should continue as if nothing had happened."

Green-Left party leader Jesse Klaver, another leading voice who had called for Mr Rutte to resign, said the decision could be a "new start, a turning point" for the Netherlands.

Dutch media said some 26,000 people had been affected by the scandal.

Tax officials were also revealed to have carried out "racial profiling" of 11,000 people based on their dual nationality, including some of those hit by the false benefit fraud accusations.

The Dutch government announced at least €30,000 in compensation for each parent who was wrongly accused but it has not been enough to silence the growing clamour over the scandal.

Victims lodged a legal complaint Tuesday against three serving ministers and two former ministers including Asscher.

Several parents released a video calling for the government to quit and "Rutte resign" has been trending on Twitter since Tuesday.

Mr Rutte has led three coalition governments since 2010, most recently winning elections in 2017 despite strong opposition from Mr Wilders.