This paper is conducted on the challenges and prospects of government’s role for cooperative development in Ethiopia. It is intended to contribute in the process of directing such a role towards more sustainable and genuine cooperative movement. Cooperative legislation; secondary data from the federal cooperative agency and existing literature on the cooperative movement in the country constitute the major source of data for the study. Qualitative approach was adopted for analysis. The major services provided by the Ethiopian government for cooperatives include establishment of legal framework; provision of capacity building activities; institutional support at different administrative levels offering audit, inspection, organization and promotion activities; exemption from income tax; entitlement to obtain land for their operation. The challenges identified include violation of cooperative principles; provision of similar services to all types of cooperatives leading to inability to avail specialized services to peculiar types of cooperatives and limited effort made for inclusion of disadvantaged groups of the community; lack of awareness about cooperatives. The different government organs responsible for cooperative promotion should for future focus on conducting research to identify areas of improvement, recognize the need for respect for cooperative identity ; direct cooperative efforts development toward maximizing benefit to members and equitable sharing among them so as to prepare them for self-sufficiency.