<p>Circular economy initiatives increasingly rely on service ecosystems to enable sustainable value creation; however, many of these systems fail to eliminate entrenched unsustainable practices. This study addresses this gap by examining why circular service ecosystems struggle to transition toward sustainability and by introducing discontinuation governance capability (DGC) as an important mechanism enabling sustainability transitions. Drawing on dynamic capabilities’ theory and service ecosystem perspectives, we develop a multi-level framework explaining how organizations detect, escalate, and terminate unsustainable routines under conditions of power asymmetry and distributed accountability. Using a rigorous mixed-methods design combining survey data from family-owned service firms in an emerging economy with qualitative process-tracing analysis, the study provides empirical evidence that sustainability outcomes depend not only on coordination and participation but fundamentally on the capacity to discontinue harmful practices. The findings suggest that DGC contributes to explaining sustainability outcomes beyond coordination, participation, and AI-mediated effects, positioning discontinuation as an important mechanism explaining circular performance. Specifically, power asymmetry stabilizes unsustainable configurations, while DGC operates as a countervailing mechanism enabling the reconfiguration of ecosystem practices. Furthermore, AI-mediated governance reshapes accountability structures, enhancing sustainability only when embedded within effective governance systems. This study contributes to circular economy and sustainability research by shifting the analytical focus from the adoption of sustainable practices to the termination of unsustainable ones, and by advancing a discontinuation-based view of sustainability transitions. It also extends dynamic capabilities theory by conceptualizing discontinuation as a distinct, power-contingent organizational capability. Ultimately, the findings demonstrate that the ability to stop harmful practices, not merely adopt sustainable ones, is a critical mechanism in circular service ecosystems.</p>