Speaking at the party's Westminster HQ, he bowed out of the leadership contest he called when he was forced into a public confession on Thursday night.

"In all this, the interests of our party have to come first, " he told reporters.

"That is where my personal, my political and my constitutional duty lies. So accordingly, I'm announcing today that when nominations do open for the leadership of the party, I will not be putting my name forward. I am standing down as leader with immediate effect."

His statement came amid signs that activists as well as MPs had lost confidence in him. Twenty five MPs issued a public ultimatum to him to stand down or face mass frontbench resignations.

Kennedy attempted to hang on, insisting he retained the "overwhelming" support of the party grassroots. However, an opinion poll showed 65% of party members wanted him replaced.

Veteran Lib Dem MP and deputy leader Sir Menzies Campbell is favourite to succeed Kennedy. Strong challenges can also be expected from party president Simon Hughes and home affairs spokesman Mark Oaten, who were both at the party's HQ to hear the statement. Education spokesman Ed Davey, one of the organisers of the ultimatum to Kennedy to quit, may also stand. Work and Pensions spokesman David Laws, former MEP Nick Clegg, and ex-London mayoral candidate Susan Kramer are outsiders.

Kennedy said his successor should be appointed as soon as possible to fight the May local elections, and pledged his support as "a loyal backbench Liberal Democrat MP". There were "serious internal political issues to address further and to resolve, " he warned.

However these were not "irreconcilable" and the new leader would inherit a party with the largest number of MPs for 80 years, he said.

"We are established as serious players in the changing reality which is three-party politics across Britain."

As Kennedy arrived home with wife Sarah Gurling, she said: "I'm very proud of him, both personally and for what he has achieved for the party."

The party's Northern Ireland spokesman, Lembit Opik, told Sky News: "I'm really sad about it. I think, as you know, that he was the right man to do the job and he has been hounded out by people who didn't appreciate his qualities."

Mark Oaten, home affairs spokesman, said: "After all the pressure that Charles has had, that was a dignified, statesmanlike performance."

Asked if he would run for the leadership, he said: "What I want to do is find the best way forward to unite this party. It's not a time for individual ambitions . . . we need to reunite this party."

Oaten added: "What the members are looking for now is for this party to unite and come together, not necessarily a bloody leadership election campaign.

Party president Simon Hughes paid tribute to Kennedy saying, "Today is a thank you day to Charles and Sarah and a sad day for us.

But it's a day that will let liberalism move on." But he "did not want to get in to" whether he would make a bid to become leader until he fulfilled his duties to organise the forthcoming contest.

Hughes said he was "not proud" of the way events had developed over the past days.

"There are certainly many people who feel [Kennedy] has been badly treated. That's a perfectly understandable point of view and I support it."

Asked whether Kennedy could return in a senior position in the future, Hughes said: "That's a question you will have to ask him."