Ted Baillieu has resigned as Victorian Premier after a Liberals-only crisis meeting on Wednesday night, saying "I do this in the best interests of the government".
Denis Napthine is the new leader and Mr Baillieu will remain in parliament.
"I love this state, I love the Liberal Party and I love this role that I have had the honour to enjoy over the last two and a bit years," Mr Baillieu told reporters.
"It is apparent to me that a change of leadership is in the best interests of the government."
"I want to thank the people of Victoria. I wish Denis Napthine the best. He has my full support. He's an outstanding individual."
Mr Baillieu said he would shortly visit the governor to tender his resignation. He thanked his family and said the most important thing is the people of Victoria.
Dr Napthine has previously led the Victorian Liberal Party in opposition but was deposed by Robert Doyle in 2002.
"Ted has put his heart and soul into the Victorian Liberal Party ... for the best part of three decades," Dr Napthine said.
"He is an outstanding individual. He is not just a colleague, he is a great friend."
Dr Napthine, who turns 61 today, declared to reporters that he would ''lead the party to the next election''.
Although his press conference was briefly interrupted by division bells, he remained calm. He dodged questions about how the events of the evening had unfolded, saying that was a matter for Mr Baillieu to explain.
He also declared the state's currents woes should be blamed on Julia Gillard and the federal government.