Julia Gillard is stepping down as Australia's first female prime minister after losing a party leadership fight with Kevin Rudd.
Mr Rudd faces becoming the country's new leader with just months until a general election after he won a Labor Party ballot by 57 votes to 45.
The defeated leader made no comment to reporters as she left the voting chamber flanked by supporters, but she later congratulated Mr Rudd and confirmed an earlier pledge that she would quit politics after the elections if she lost the ballot.
She said it had been a "humbling" privilege to have been prime minister, adding: "I thank the Australian Labor Party for that privilege and I thank the Australian people for their support."
Mr Rudd, who had made a string of unsuccessful attempts at winning back the reins since being ousted by Ms Gillard in a similar 2010 showdown, praised Ms Gillard's achievements in power and called her a "remarkable reformer".
But he said "negative, destructive personal politics" had dishonoured parliament and had done nothing good for the country. "In fact it's been holding our country back," he said. "All this must stop."
Welsh-born Ms Gillard called the party ballot earlier amid reports that her bitter rival's supporters were gearing up for a fresh leadership challenge.
Opposition leader Tony Abbott Opinion polls had shown that the party could face huge losses in the September elections, but that Mr Rudd would be the more popular leader.
Mr Rudd must now demonstrate that he can command a majority of the House of Representatives before the governor-general makes him prime minister.
If he cannot, opposition leader Tony Abbott could be asked to form a government, or the elections could be moved from September to August.
The power struggles between Ms Gillard and Mr Rudd had been well documented over the past three years.
In March, she managed to retain the leadership of the party after she was urged to hold a ballot. Mr Rudd admitted at the time he did not have enough support to defeat her.
During a similar battle in 2012, a video emerged of the Mandarin-speaking former diplomat Mr Rudd slamming his fist in an expletive-ridden tirade about a Chinese interpreter. Ms Gillard's office was forced to deny leaking the footage.
As Ms Gillard called the latest ballot with just hours of notice, she appeared frustrated over the petition for a vote that was circulating within the party.
She said: "Call me old-fashioned, but the way in which these things are normally done is a challenger approaches the leader of the Labor Party and asks them to call a ballot for the leadership, who shake hands and then a ballot is held.
"That hasn't happened but in these circumstances I do think it is in the best interests of the nation and in the best interests of the Labor Party for this matter to be resolved ... "
Mr Rudd, who first swept to power in 2007, had said Labor was facing a "catastrophic defeat" at the next election unless there was "change".
The 55-year-old has promised tighter control of public spending, a speedier return to surplus budgets, and stronger economic growth.
He said he would resume the job "with humility, with honour and with an important sense of energy and purpose".
The blow to Ms Gillard has surprised people in her native Wales as well as her adopted homeland.
Born in Barry, in the Vale of Glamorgan, in 1961, she lived there before her family emigrated to Australia when she was a girl.
Vale of Glamorgan county councillor Ian Johnson said she remained popular, adding: "She has done a fantastic job and broken a glass ceiling in politics.
"Regardless of what you think about her politics she's been an inspiration - not just in Australia but also back here in Wales."
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