Gordon Brown resigned immediately as Labour leader following the collapse of talks on creating a Lib-Lab coalition. Aides, however, denied that he was planning to stand down as an MP, just days after being re-elected as MP for Kirkcaldy and Cowdenbeath.
Harriet Harman, the Leader of the Commons and Labour's deputy leader, is expected to take over as acting party leader until Mr Brown's successor is chosen.
After tendering his resignation as Prime Minister at Buckingham Palace last night, Mr Brown went to Labour headquarters to thank the staff who had worked on the party's campaign. They lined Victoria Street to welcome him and some were tearful.
Labour sources said a leadership contest would now be speeded up from the plans first announced by Mr Brown on Monday. Labour's National Executive Committee (NEC) will meet next week to fix the timetable, and a new leader could be in place within two months.
The possible contenders include David Miliband, the outgoing Foreign Secretary; his brother Ed, the outgoing Energy and Climate Change Secretary; Ed Balls, the outgoing Schools Secretary; and Jon Cruddas, the prominent backbencher. Alan Johnson, the outgoing Home Secretary, is thought unlikely to stand. Ms Harman has said she will remain as deputy leader and has no plans for the top job. She is expected to become the second woman to head the party temporarily. In 1994, when John Smith died, Margaret Beckett, his deputy, took over as acting leader until the contest in which Tony Blair was elected.
Labour MPs called yesterday for the leadership election to be held as soon as possible. They warned that Labour would be "in limbo" and face a "leadership vacuum", which could put the party at a disadvantage if there is another general election this autumn.
A senior Labour MP, Barry Sheerman, said it would be "crazy" to delay the contest until the autumn, because the winner would have "no profile" with the voters in the run-up to a possible general election.
John Mann, another backbencher, said the NEC should ensure that a new leader is installed before Parliament begins its summer break in late July.
Mr Mann said the candidates in the leadership contest should be forced to take part in a televised debate.