"I decided that for the unity of the (ruling party) a change of chairman would be more appropriate. I am not considering running at the May 22 congress," Davutoglu told the nation.
Davutoglu, who had fallen out with President Recept Tayyip Erdogan, announced he was stepping aside following a meeting with executives of the ruling Justice and Development Party, or AKP, which has dominated Turkish politics since 2002.
The decision is not effective immediately. The party will hold an emergency convention May 22 to select a new party leader who would also replace the premier.
He pledged loyalty to Erdogan, saying the president's honour was his honour, and suggested he would not be a party to any efforts to divide the party "I feel no reproach, anger or resentment against anyone," Davutoglu said.
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The shake-up is seen as the outcome of irreconcilable differences between Erdogan, who would like to see the country transition to a presidential system, and his once-trusted adviser. It comes a day after Davutoglu's government scored a victory of sorts, with the European Union's executive commission recommending approval of a deal to give Turkish citizens the right to travel to Europe without visas.
But the former professor, foreign minister and adviser to Erdogan tried to act independently on a range of issues and often proved to be a more moderating force to Erdogan, who has adopted an increasingly authoritarian style of government.
Crisis talks between the former political allies dragged out for nearly two hours late Wednesday but clearly failed to resolve their differences.
Erdogan took issue with Davutoglu after he spoke of the possibility of resuming peace talks with the PKK if it withdraws its armed fighters from Turkish territory.
Erdogan said in a speech that it was out of the question for the peace process to restart, saying military operations would continue until the very last rebel is killed and the PKK threat is removed.