After a meeting of the party's executive committee, Davutoglu said in a speech in Ankara that under the current circumstances, he did not intend to run for the AKP leadership at an extraordinary congress set for May 22.
"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," said the former academic-turned-politician.
The decision is not immediately effective, which means Davutoglu will continue to hold the premiership until the May 22 party congress.
According to AKP rules, the party chairman and head of government are the same person.
Speculation about the popular prime minister’s ouster was rife in recent days following weeks of increasingly public tension between Erdogan and Davutoglu.
The divisions erupted into the open on Wednesday, with the two leaders holding crisis talks at the presidential palace that failed to resolve the conflict.
However in his speech to the nation on Thursday afternoon, Davutoglu called for party unity and was careful to stress that he would “never utter a word” against Erdogan.
A planned visit this week by the premier to Bosnia has already been cancelled, media reports said.
'Palace coup'
The tumult at the top of Turkish politics unnerved financial markets, which lost almost four percent in value against the dollar on Wednesday and rallied only slightly Thursday.
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 that would make Turkey a presidential system.
Since becoming president in August 2014 after over a decade as prime minister, Erdogan has sought to tighten his grip on the levers of power, leading critics to accuse him of authoritarianism.
Soner Cagaptay, director of the Turkish Research Program at The Washington Institute, said the move was the next stage in a "hollowing out" of Turkish institutions by Erdogan, who already controls the army and parliament.
"It shows how much power has been massed in one person's hands," he told AFP, adding that Erdogan was now exercising more control than anyone in Turkey's modern democratic history.
The departure of Davutoglu "will allow Erdogan to distance himself from some of his failed policies that can be attributed to Davutoglu," he added.
Leading potential successors if Davutoglu steps aside include the president's longtime henchman, Transport Minister Binali Yildirim and the youthful Energy Minister Berat Albayrak, 38, who is married to the president's eldest daughter Esra.
But press reports also suggested a less high-profile figure was possible, such as Deputy Prime Minister Yalcin Akdogan, Justice Minister Bekir Bozdag, or AKP deputy chairman Mehmet Ali Sahin.
"Whoever the new PM will be, it is clear that it will mean more power over the government by the president," said Ozgur Altug, chief economist at BGC partners in Istanbul.
'Presidential system begins'
Relations between Erdogan and Davutoglu had been seen by analysts as uneasy, but the speed with which it burst into the open took many by surprise.
The premier has championed a deal with the EU to stem the flow of refugees across the Aegean Sea -- an issue in which the president has shown little interest.
On Wednesday, the EU Commission announced it was recommending giving Turks visa-free travel as part of the deal, one of Ankara's key demands.
Davutoglu has said there is no need for haste in Erdogan's drive to create a presidential system in Turkey, a pet project of the president that risks diminishing Davutoglu's own standing.
He has also clashed with Erdogan over whether journalists should be held in pre-trial detention.
A decision last week by the executive committee of the AKP to remove Davutoglu's right to appoint regional party officials was also seen by commentators as a severe blow to the authority of the premier.
If Davutoglu quits, it would mean that Turkey is heading for a change of premier at a time when Ankara is battling Kurdish as well as Islamist militants as well as trying to implement its end of the EU migrant deal.
"Turkish politics is entering into a period where the presidential system has de-facto started," said Fuat Keyman, director of the Istanbul Policy Center think tank.
"Whoever becomes the new leader of the AKP and premier will have to accept the new nature of the system."
(FRANCE 24 with AP, AFP and REUTERS)
5/5/16
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