The Central American country, which has a population of 6.6 million and neighbours Honduras, had been part of a small group of nations holding formal ties with Taiwan. But it has now cut all diplomatic relations. The shift comes amid growing tensions between Washington and Beijing over the East Asia island.
China continues to ramp up political and military pressure on Taiwan – a territory Chinese President Xi Jinping considers a wayward province.
Nicaragua, which has a longstanding relationship with the US, will now also recognise China’s claim of sovereignty over Taiwan.
The controversial move threatens to undermine the position of the US to defend the independence of Taiwan.
The pivot by Nicaragua comes just weeks after Mr Biden and President Xi held a tense virtual discussion.
Speaking last month, the Chinese dictator warned the US that encouraging Taiwanese independence would be “playing with fire”.
China’s state-run Global Times said President Xi blamed recent tensions on “repeated attempts by the Taiwan authorities to look for US support for their independence agenda as well as the intention of some Americans to use Taiwan to contain China”.
It added: “Such moves are extremely dangerous, just like playing with fire. Whoever plays with fire will get burnt.”
China has increased its military presence in Taiwan and, speaking in October, President Biden vowed the US would protect Taiwan.
US State Department spokesman Ned Price warned the people of Nicaragua would be worse off by the move to back China.
He said: “We do know, however, that this deprives Nicaragua’s people of a steadfast partner in its democratic and economic growth.
“We encourage all countries that value democratic institutions, transparency, the rule of law, and promoting economic prosperity for their citizens to expand engagement with Taiwan.”
China’s foreign minister, Wang Yi, took aim at the US and stressed nations have the right to choose who they work with.
He said: “The US has adopted outside standards on this issue. The US itself established diplomatic relations with China some 40 years ago.
“What right do they have in preventing other sovereign countries from making their own choices?”
The Taiwan government has said it will immediately terminate all ties and recalled diplomatic staff to “safeguard national sovereignty and dignity”.
Taiwan was expelled from the United Nations in 1971 with the seat transferred to China, at the time most countries shifted ties to Beijing.
Since 2016, the number of nations with formal ties with Taiwan has been cut from 21 to just 14.
El Salvador and the Dominican Republic switched in 2018, and Panama in 2017.