Schwarz-Schilling made the decision because the House of Representatives had ignored warnings that the new government would not be able to begin its term before candidates for ministers of the interior, finance, justice, education and refugees were vetted.
The outgoing government will continue operating until a new one is appointed, Schwarz-Schilling told reporters in Sarajevo.
He went on to say that background checks on five ministerial candidates had been completed and that one of the candidates would not be approved.
The international representative said the appointment of the new government constituted manipulation, which prompted him to act.
The transfer of authority from the old to the new government, scheduled for today, had to be cancelled and new prime minister Nedzad Brankovic could only tell reporters who gathered for the inauguration ceremony he expected the problem to be solved soon.
Commenting on Schwarz-Schilling's decision, the President of the Federation of Bosnia-Herzegovina, Borjana Kristo, said the government had to be appointed because otherwise federal authorities would have been blocked and would not have been able to adopt a new budget, which could lead to new elections.
The new government of the Croat-Muslim entity is to be comprised of ministers from the Party of Democratic Action (SDA), the Party for Bosnia-Herzegovina (SBiH), the Croatian Democratic Union (HDZ BiH), HDZ 1990 and the Party of Independent Social Democrats (SNSD).
Five of 16 ministerial posts will be held by members of the Croat community.