"As I can't fight the next election as leader of our party, I believe it is better for me to stand aside sooner rather than later so that the party can choose someone who can," Howard, 63, told supporters on Friday, the day after the nationwide vote.
"I intend to stay as leader until the party has had the opportunity to consider whether it considers those (leadership) rules should be changed," he said.
Under Howard, the Conservatives slashed Blair's parliamentary majority from 161 to less than 70 seats.
That is a breakthrough compared with the one seat they gained at 2001's election after a rout in 1997, but the party's 33% vote share was barely higher than four years ago.
Some in the party think Howard's relentless focus on emotive issues such as immigration won them seats but is not the platform on which to win power.
The Conservatives now have few, if any, famous faces that resonate with the public to take the helm.
Home affairs spokesman David Davis is likely to be one candidate. He is viewed as more hardline than Howard.