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Stéphane Dion announced his departure as Liberal Leader today, paving the way for Michael Ignatieff to take over as interim chief even as rival Bob Rae digs in his heels.

"As the Governor-General has granted a prorogation, it is a logical time for us Liberals to assess how we can best prepare our party to carry this fight forward," Mr. Dion said in his resignation letter.

"There is a sense in the party, and certainly in the caucus, that given these new circumstances the new leader needs to be in place before the House resumes. I agree. I recommend this course to my party and caucus. As always, I want to do what is best for my country and my party, especially when Canadians' jobs and pensions are at risk.

"So I have decided to step aside as Leader of the Liberal Party effective as soon as my successor is duly chosen."

Mr. Dion is under fire for the way in which he handled the formation of a coalition with the NDP and MPs have expressed deep concern about whether he is the individual to lead the party into a power-sharing agreement with Jack Layton's party.

Initially, he had announced his intention to step down in May, during the Liberal leadership convention. But the party pressed him to move up that decision.

Another contender, Dominic LeBlanc, withdrew from the race Monday and threw his support behind Mr. Ignatieff. "Michael can bring the Liberal Party together in a way that no other can, and he can bring the country together in a way that Stephen Harper has not," the New Brunswick MP said at a press conference in Ottawa.

Mr. Rae, meanwhile, is hanging tough. Speaking in Toronto, he said it is up to the party membership to decide who becomes the next leader and suggested an interim leader would have an unfair advantage in the race. 

The former NDP premier of Ontario added that he prefers democratic contests to coronations.

Mr. Dion's decision to step down was greeted warmly by both the New Democrats and the NDP Leader Jack Layton issued a statement, saying he is looking forward to working with the next leader of the "Liberal-New Democrat coalition" on proposals for the economy.

"Mr. Dion and the entire Liberal caucus have shown courage and leadership by putting aside political differences with New Democrats to forge a majority coalition," Mr. Layton said. "They have made a commitment to the coalition to get the economy on the right track for Canadian families."

Leader Gilles Duceppe also issued a press release, praising Mr. Dion's willingness to put aside his own personal interests in order to allow the Liberals to choose a new leader. "Our opinions have differed radically in many areas, particularly regarding the status of, but Stéphane Dion has always strived to serve the interests of the population in the best way possible, according to his convictions," Mr. Duceppe said.

Québécois' support for the coalition as long as the new leader respects the terms of this agreement.

On Sunday, Mr. Ignatieff launched a bulldozer charge at the leadership, campaigning for the party's parliamentary caucus to elect him immediately as an interim replacement for Mr. Dion.

Mr. Ignatieff's organizers said they had the support of at least 55 of the party's 77 MPs, including Mr. Dion's most vocal supporter, suburban Toronto MP Bryon Wilfert, and MP Maurizio Bevilacqua, who chaired the 2006 leadership campaign of Mr. Ignatieff's major opponent, Bob Rae.

In addition, Mr. LeBlanc flew to Toronto Sunday night to meet with Mr. Ignatieff.

The plan calls for Mr. Dion's resignation followed by a vote that would likely install Mr. Ignatieff at the helm as interim leader. At a second-stage process — almost certainly the leadership convention currently scheduled for May — the party either would confirm him as leader or turn to his only other declared opponent, Mr. Rae.

The party's caucus executive met Sunday night and agreed to recommend the two-stage selection process to the national party executive, which is to decide the issue on Tuesday.

Should the Ignatieff plan prevail, the proposed Liberal-NDP coalition could well be scuttled. Mr. Ignatieff was never an avid supporter of the coalition and had turned against it by Saturday, according to party insiders.

Support for the coalition from the caucus had also weakened.

Mr. Rae also wanted Mr. Dion to resign sooner rather than later, but he was strongly opposed to the Wednesday caucus vote. He has proposed a one-member, one-vote combination of telephone and online balloting to be held in January.

But time seems to have run short.

Mr. LeBlanc has told friends he thinks it is "totally untenable" and "irresponsible" for a decision on the next Liberal leader to wait until a May convention.

Another confirmed Ignatieff supporter urging a swifter change of leader was Mr. Bevilacqua, the Vaughan MP who co-chaired the Rae leadership campaign in 2006 and is a former junior finance minister and former chairman of the influential Commons finance committee.

Mr. Bevilacqua said in an interview that having worked with Mr. Ignatieff last spring on the immigration platform for the party, he believes that Mr. Ignatieff "understands what needs to be done to get Canada back on track" and the "right person to lead the Liberal Party during these difficult and challenging economic times."

There is nervousness among Ontario Liberals, Mr. Bevilacqua said, that Mr. Rae's tenure as the province's NDP premier during a difficult economic period would hurt the party now if he became leader.

Two party sources said well-known Liberal and former Paul Martin adviser Mike Robinson has left the Rae camp over disagreements with Mr. Rae's embracing of the coalition. Mr. Robinson could not be reached for comment on Sunday.

Richmond Hill MP Bryon Wilfert, who has been a staunch supporter of Mr. Dion, said he informed Mr. Ignatieff he would support the leadership candidate one month ago.

"Both of us agreed not to say so publicly given my close relationship with Mr. Dion. The situation was very difficult," Mr. Wilfert said in an interview. His decision to go public with his support Sunday came after he got word Mr. Dion is planning to announce he will step down this week.

"I am deeply saddened that it's come to this point. In this business loyalty is a short commodity…" Mr. Wilfert said. "I obviously believe if he is to step down it's going to have to be a permanent individual that will be taking the realm."

Just a week ago, the three leadership candidates and Liberal MPs were united behind Mr. Dion, who negotiated a Liberal-NDP coalition, backed by the Bloc Québécois, to replace the Conservative government.

But a botched television address and negative opinion polls on the coalition doomed Mr. Dion's hopes of staying in place until the leadership convention planned for Vancouver in early May.

Prime Minister Stephen Harper avoided a confidence vote by shutting down Parliament last Thursday, and promised to introduce a budget as soon as the House comes back at the end of next month.

A growing number of Liberals want Mr. Dion to be replaced by then.

Mr. Ignatieff and Mr. Rae both hit the airwaves on Sunday and called for an accelerated leadership process. Liberal sources said that Mr. Rae could support a system in which every Liberal member votes for the new leader next month, while the Ignatieff camp has contemplated a selection process involving the party hierarchy.

While there is no consensus on the mechanics, all camps agreed that Mr. Dion must leave as soon as possible.

Among the latest was former minister and Liberal heavyweight John Manley, who called on the weekend for Mr. Dion to step down.

"Confronted by a political crisis that was not of his making, Mr. Dion became an obstacle to his party, and to the opposition, in dealing with it. His weakness probably fuelled the Conservative hubris that led to this fiasco in the first place," Mr. Manley wrote in The Globe and Mail.

Mr. Manley argued it was "delusional at best" to believe that the public would have want the recently defeated Mr. Dion as coalition prime minister.

With reports from Michael Valpy in Toronto and Daniel Leblanc, Jane Taber and Bill Curry in Ottawa and The Canadian Press