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A showdown between Alberta's two most powerful politicians has led to the resignation of the Premier, thrusting Canada's foremost political dynasty into turmoil and positioning Alberta for further shift toward the political right.

Premier Ed Stelmach made his sudden announcement Tuesday morning, saying he wasn't prepared to seek another term and would eventually step down as party leader. It caught many, including his own cabinet ministers, by surprise. But sources tell The Globe and Mail the decision was forced that morning by Finance Minister Ted Morton, who had planned to resign as finance minister later that day - all over the provincial deficit budget, which Mr. Morton, a fiscal hawk, wanted to rein in.

The scenario was a political and ideological standoff between the two men, who have clashed repeatedly behind closed doors since Mr. Stelmach beat Mr. Morton in a 2006 leadership race. Mr. Morton kept his intention quiet, but Mr. Stelmach caught wind. Rather than fly to meet Mr. Morton Tuesday afternoon, sources say, Mr. Stelmach hastily called a news conference. Mr. Morton thought he was about to be fired. Instead, his long-time rival stepped down, fearful of what a battle between the two heavyweights would do to the party.

A staunch social and fiscal conservative, Mr. Morton tolerated Mr. Stelmach's bumpy reign until last month, when the Premier blindsided his party by announcing publicly the province wouldn't return to a surplus by 2012-13, as was once pledged.

Sources say Mr. Morton decided no more than 48 hours earlier he'd rather resign than submit such a budget. It was on Tuesday morning at 11 a.m. that Mr. Stelmach was set to fly from Edmonton to Calgary for a Treasury Board meeting to discuss the budget. Sources say Mr. Morton was to submit his resignation as finance minister in person before that 1 p.m. meeting, but planned to stay in the party caucus.

That left Mr. Stelmach with several options, including firing Mr. Morton. Had Mr. Morton been ejected from the party altogether, sources say several other caucus members would have followed suit, fracturing the party. Instead, Mr. Stelmach simply announced at an 11:30 press conference he would not seek re-election and would soon step down as Premier.

"We didn't see this coming at all," one source close to Mr. Morton said.

The Progressive Conservatives have been in office since 1971 and still hold an overwhelming majority in the legislature, but the party is in crisis. Mr. Stelmach had hoped to hold an election in March, 2012, but that will likely be delayed for a leadership race. Meanwhile, the party is facing a challenge on its right flank in the Wildrose Alliance party, led by Danielle Smith.

Mr. Morton tops a list of potential candidates to replace Mr. Stelmach. Mr. Morton would lurch the party to the right and shrink the size of government, but sources say he hasn't decided whether he'll run. Issuing a large deficit this year would have hurt his reputation as a cost-cutter, suggesting his own ambition precipitated Tuesday's decision.

Instead, he's focused on the enduring battle - the budget. The PC caucus is meeting in Calgary on Wednesday and Thursday and Mr. Morton, who must sign off on the document, still refuses to put his name to it.

Mr. Stelmach, on the other hand, said he'd formally resign as leader "at a further date" but will first finish the work he was elected to do - the budget.

"We will present the budget that shows the way to being balanced on a fully consolidated basis no later than 2013, a year later than we had hoped," he said.

Mr. Morton was known to be unhappy, but kept his decision to resign close to his chest. One cabinet minister, Lindsay Blackett, was informed of the Premier's decision by Calgary's mayor before hearing it from the party whip.

"You're just shocked, and you don't know what transpired to let that happen. I know there's some dissent amongst a few people with his leadership but I didn't think it was to the degree that it must have been," Mr. Blackett said.

MLA Doug Griffiths, who is parliamentary assistant to Mr. Morton, last discussed the budget with the minister on Monday but didn't know he planned to resign rather than sign it.

"I know there was concern over the budget. Nobody is happy over running a deficit," Mr. Griffiths said. "But this has been the worst downturn since the Dirty 30s, globally.

"There's been lots of pressure on cabinet."

However Kyle Fawcett, a first-term PC MLA from Calgary, saw the caucus split.

"I do think that there was a bit of an issue in caucus," Mr. Fawcett acknowledged. "There were some challenges around, obviously, this upcoming budget, and some promises that had been made. And I think the premier saw that as an obstacle that maybe he didn't want to tackle at this point in his life of public service."

Some Tory insiders were relieved to hear of Mr. Stelmach's decision. Among those considered as a force to unite the party are Ms. Smith, the leader of Wildrose. They hope to avoid a split of the right-wing vote, which could open the door for gains by the Liberals, New Democrats and upstart Alberta Party on the left. Ms. Smith dismissed the notion as "the dumbest thing I've ever heard."

With a report from Marsha Lederman and Ian Bailey in Vancouver