Prime Minister Keir Starmersaid on Monday he would resign, with a new leader to be in place by the time parliament returns in September.
Less than two years after he won a landslide election victory that promised to end chaos in British politics, Starmer said he would support whoever replaced him.
Pressure had been building for months
The threat to Starmer, which had been building for months, increased sharply on Friday when Andy Burnham, the Greater Manchester mayor, decisively won a parliamentary election to return to Westminster, beating a candidate from Nigel Farage's Reform UK party, which has led national opinion polls for more than a year.
That victory gave hope to Labour lawmakers that Burnham, a career politician known for his communication skills, could transform the fortunes of a party that has lost support under Starmer, whose popularity ratings have sunk to the lowest for any British leader.
Beyond saying that the country needs fundamental change and to bring down the cost of living, Burnham has yet to make clear his approach to foreign affairs, the economy and defence.
Like Starmer, he could find he has little room to manoeuvre, hemmed in by bond market investors opposed to any additional borrowing, and confronted by an angry electorate which believes the country is not working properly.
Britain already has the highest borrowing costs in the Group of Seven wealthy nations due to its high debt and interest payments, years of anaemic economic growth, its struggles to cut spending and the need to invest in areas like defence.
Investors spoken to by Reuters were divided over whether Burnham, who said last September that Britain had to get "beyond this thing of being in hock to the bond markets" would respect the need to reassure markets.
"In our view, a Burnham premiership would inherit a precarious fiscal situation with few tools to deliver meaningful change," economists at Citibank said on Friday.
Starmer had pledged to fight any challenge
Starmer had said on Friday he would stand in any formal Labour leadership contest that sought to replace him. But that appeared to change over the weekend.
Whoever replaces Starmer will become Britain's seventh prime minister since the Brexit vote to leave the European Union which took place 10 years ago this week.
That level of turnover - the highest in Britain in nearly two centuries - underlines the struggle of maintaining the support of voters angry at successive failures to improve living standards, public services and tackle illegal immigration.
The political advisory group Eurasia had said the best outcome could be for Starmer to say he will step down in September, enabling him to attend a UK-European Union reset summit in July and give Burnham time to prepare for government.
