"I dislike to see my party divided," 69-year-old Rajapaksa who ruled the Island nation for a decade said in a statement while handing over the party chairmanship to the new Lankan President Sirisena.
Scores of senior party leaders had joined 63-year-old Sirisena before and after he became the president on January 9.
"With effect from today I will be handing over the leadership to President Maithripala Sirisena", Rajapaksa said in a statement.
He was also the General Secretary of the SLFP. Rajapaksa in the election run-up accused Sirisena of betraying him by leaving the party to be the opposition unity candidate.
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It remains to be seen how the other parties in Sirisena's coalition would react to Sirisena now becoming the SLFP president.
Sirisena since becoming President appointed Rajapaksa's arch-rival Ranil Wickremesinghe as Prime Minister and opposition coalition members as his ministers.
Since the election defeat, Rajapaksa has faced a tough time, with the new government accusing him of a failed coup attempt to deny Sirisena victory.
Rajapaksa, who amended the constitution soon after his victory in 2010 to give himself a record third term, had called the election two years ahead of schedule.