Divisions between Davutoglu and Erdogan that had been rumoured for months burst into the open yesterday, with the two leaders holding crisis talks at the presidential palace that failed to resolve the conflict.
Davutoglu said after a central executive committee meeting of the ruling Justice and Development Party (AKP) that the party would hold an extraordinary congress on May 22 and he would not be standing for a new mandate.
According to the conventions of the AKP -- a party co-founded by Erdogan to bring Islam into the mainstream of Turkey's secular politics -- the party chairman and head of government are the same person.
"I don't think I will be a candidate in the next congress in the current circumstances," Davutoglu said.
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He added that after "consultations with friends", including Erdogan, "I have decided that it will be better to change party leader... For the continuation of the AK Party's unity".
In an emotional farewell statement, Davutoglu gave a long description of his achievements as premier and insisted he held no regrets.
But alluding to a lack of support by some within the AKP, he said he could not be a candidate for the party leadership "if there is no consensus".
The appointment of a potentially more pliant prime minister would allow Erdogan to further consolidate his powers as he seeks to win backing for controversial constitutional changes to make Turkey a presidential system.
Since becoming president after over decade as premier, Erdogan has sought to tighten his grip on the levers of power, leading critics to accuse him of authoritarianism and cracking down on press freedom.