The parties will be given until Monday to come to terms, Downing Street announced soon after the 4 p.m. (11 a.m. ET) cutoff, following another day of deadlock in Belfast.
James Brokenshire, Secretary of State for Northern Ireland, had warned the two largest groups, the Democratic Unionist Party and Sinn Féin, that failure to come to a compromise would have "profound and serious" implications.
The extension gives both sides the opportunity to avoid the prospect of direct rule from London and restore the country's power-sharing executive, which has not sat since January.
Though it would not be the first time direct rule has been imposed since the signing of the historic 1998 Good Friday Agreement, which brought an end to decades of bitter sectarian conflict, the move would still be controversial.
What's going on?
Northern Ireland's power-sharing arrangement means nationalists and unionists must work together, with the First Minister and Deputy First Minister chosen from different sides.
But the two main parties -- the DUP, which wants to remain part of the United Kingdom, and Sinn Féin, which is seeking a united Ireland -- have so far failed to reach an agreement despite extensive talks.
Their joint administration collapsed in January when then-Deputy First Minister Martin McGuinness -- who died in March -
- stepped down after a dispute with then-First Minister Arlene Foster over a renewable-energy scheme.
That triggered a snap election in which the DUP won 28 seats to Sinn Féin's 27, making them the two largest groups in the assembly.
Thursday's deadline came in a week which saw the DUP reach a deal with British Prime Minister Theresa May to prop up her government.
Under the agreement, the DUP's 10 lawmakers will back May's minority government over the Queen's Speech -- which sets out the legislative program -- as well as bills relating to national security and Brexit.
In return, the UK government has pledged an extra £1 billion ($1.2bn) investment in Northern Ireland over the next two years, in addition to the £500 million ($600m) it had already committed.
But the deal has been heavily criticized by Sinn Féin, which said the government could no longer be impartial in attempting to maintain peace in Northern Ireland.
What are the sticking points?
The two sides are at loggerheads over a number of issues ranging from Brexit, the legacy of the Northern Ireland conflict and the Irish language.
Sinn Féin originally said it would not accept any deal under which Foster returned as First Minister -- though that stance appears to have softened.
But Sinn Féin wants to see movement from the DUP on a number of areas including same-sex marriage, which is legal in the rest of Britain and the Republic of Ireland.
The DUP, which opposes same-sex marriage and has an anti-abortion stance, is unlikely to budge.
It is also resisting calls from Sinn Féin to introduce a measure giving the Irish language the same status as English, while agreement over how to deal with the legacy of the Northern Ireland conflict remains elusive.
There are also differences over Brexit, with the DUP in favor of leaving the European Union, though it is against a hard border with the Republic of Ireland, which could hamper trade and harm peace in the region.
While Sinn Féin wants Northern Ireland to be granted special status with the EU, the DUP does not want anything to distinguish the region from the rest of Britain when it comes to ties with Brussels.
What happens if there is no deal?
If the parties fail to come to an agreement by Monday's deadline, it will be up to James Brokenshire, the Northern Ireland Secretary, to decide whether to reimpose direct rule or extend the deadline further.
Direct rule would mean London-appointed Conservative ministers would run the region's devolved departments and decide how to spend the £1 billion the DUP has
secured under its deal with PM May.
Another option that could be introduced would be allowing local civil servants to take charge of the departments until a fresh round of negotiations can take place.
There is also the prospect of yet another Assembly election, if Brokenshire sees fit.
All eyes are now back on Stormont, but those inside the talks have yet to offer much in the way of encouragement.