King Jigme Singye Wangchuck, 50, announced on Saturday that his eldest son, the crown prince, would take over from him in 2008, when the country will hold its first national elections.
The king has ruled the Land of the Thunder Dragon, as Bhutan is known, since ascending the throne in 1972 at the age of 17.
Kinley Dorji, editor of Bhutan's national newspaper, Kuensel, expressed his countrymen's shock. "The entire nation was bewildered when the king made this surprise announcement of stepping down in favour of the crown prince and holding democratic elections," he said.
"The people of Bhutan did not really expect this historic and dramatic decision to come so early."
Best time to go
King Wangchuck told a crowd of 8000 yak-herders, monks, farmers and students at the remote village of Trashiyangtse, about 900km east of Bhutan's capital Thimphu, that he would immediately hand responsibility to Crown Prince Dasho Jigme Khesar Namgyal Wangchuck.
He said now was the best time to move on.
"The best time to change a political system is when the country enjoys stability and peace," he told the crowd.
Bhutanese respect the Oxford-
educated crown prince
"Why wait for a revolution? Why crown an heir only when the nation is in mourning for a late king?"
The crown prince, 25, would be enthroned before Bhutan adopts a constitution and elects a prime minister in 2008 under its first parliamentary democracy.
The king, who married four sisters to be his queens, will give up absolute power to become a constitutional monarch to the largely Buddhist nation of almost 600,000 people.
People across the country received the king's announcement with shock and disbelief.
Tushi Zemba, a hotelier in Samdrup Jongkhar district, bordering the northeast Indian state of Assam, said: "I was shell-shocked and cried when I heard the news of our king deciding to step down."
Witnesses said people, unable to come to terms with the news, joined hundreds of Buddhist monks to hold prayers.
The king took four sisters to be
R Gyeltshen, a retired government official in Thimphu, said: "We have not yet understood what could be the implications when there is a change from monarchy to parliamentary democracy. We are offering prayers for the well-being of the country."
The transition began four years ago when the king handed over the powers of daily government to a council of ministers, and empowered the national assembly to force a royal abdication if the motion was backed by three-quarters of its membership.
Bhutan unveiled a 34-point constitution earlier this year which is now being sent to about 530,000 citizens for their views. It is expected to be ratified after a referendum.
Once adopted, the constitution will replace a royal decree of 1953 giving the monarch absolute power.
Although the Bhutanese are surprised by the king's decision, they hold the Oxford-educated crown prince in equally high esteem.
The eldest of the king's five sons and five daughters, he received his official recognition as crown prince on 21 October 2004.
A Bhutanese government official, who wished to remain anonymous, spoke of the crown prince's good standing.
"The crown prince is a very popular figure in Bhutan and has been playing a major public role by taking active part in both government and non-government activities," he said.
"There is absolutely no doubt about his capacity, although a father would always remain a father."