Gordon Brown is to step down as Prime Minister in September and will ask the party to "set in train" a leadership contest to replace him.
The Prime Minister also revealed Liberal Democrat leader Nick Clegg wants to start discussions with Labour to try and form a coalition government.
He said: "If it becomes clear the national interest w can best be served by forming a coalition between the Labour party and the Liberal Democrats then I believe I should discharge that duty to form that government which would in my view command a majority in the House of Commons in the Queen's speech and any other confidence vote."
The Prime Minister said in a statement he had "no desire to stay in my position longer than is needed to ensure that the path to economic growth is secure" and he will oversee coalition talks between Labour and the Liberal Democrats.
He said he would act in the national interest and hoped a "progressive government" could be formed to stabilise the economy.
Gordon Brown's continuing reign as Prime Minister has been cited as a major stumbling block to any Labour/Lib Dem pact.
He added the fact no party had secured an overall majority in the election - one of the tightest fought in many years - was a personal judgement on him.
"I therefore intend to ask the Labour Party to set in train the processes needed for its own leadership election.
"I would hope that it would be completed in time for the new leader to be in post by the time of the Labour Party conference."
Read Jon Cudby's blog on Brown's departure.
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