Thaksin said he will not accept the post of prime minister after controversial weekend elections boycotted by the opposition.
Thaksin appeared to be bowing to the demands of the opposition, who have been organising massive street rallies against the premier, whom they accuse of corruption and abuse of power.
"I want to retreat by not taking the prime ministership, but I have to be caretaker prime minister until the selection process for the next prime minister is complete," he said in a nationally televised address on Tuesday.
He did not name a successor.
It is uncertain when parliament will convene, as last Sunday's election left 38 constituencies without winners, due largely to an opposition boycott of the polls, and the Thai constitution says parliament cannot convene until all seats are filled.
"I want to retreat by not taking the prime ministership, but I have to be caretaker prime minister until the selection process for the next prime minister is complete"
Thai prime minister
The Thai Election Commission meanwhile said t
hree opposition parties which boycotted the election last weekend can run in by-elections on April 23 for seats left empty.
This could help solve a constitutional crisis as parliament cannot convene until all seats are filled and a new prime minister to succeed Thaksin cannot be elected until the legislature meets.
"These by-elections allow all parties that have registered with the EC to run. It does not have to be only the 18 parties that competed in the April 2 election," Wassana Permlarp, the EC chairman, said.
Thaksin made the announcement just hours after a "procedural" meeting with King Bhumibol Adulyadej, and amid threats of new mass protests in Bangkok against him.
His opponents had earlier stated that they would call off their protests as soon as Thaksin announced his resignation, rejecting his proposal for a national reconciliation committee.
Thaksin said that his reason for not accepting the post of prime minister is because "this year is an auspicious year for the king, whose 60th anniversary on the throne is just 60 days away".
"I want all Thais to reunite," he said, apologising to the 16 million Thais who voted for him in Sunday's election.
"Let's clean up our house and stop the chaos," he said.
Thaksin said that he would remain a member of parliament and the head of the Thai Rak Thai (Thai love Thai) party.
A key opposition leader declared victory moments after the Thaksin announcement.
Thailand witnessed massive
protests against Thaksin
"This is our victory. If we had not helped each other (in the protests), today would not have happened," Chamlong Srimuang said.
His People's Alliance for Democracy had vowed earlier in the day to launch fresh protests if Thaksin did not quit, indicating that the premier's bid to end weeks of political instability by calling the early polls had failed.
The leader of the Mahachon Party, which boycotted the polls, hailed Thaksin's decision.
"I am glad and I praise him for it. I wanted to hear this for a long time. Now everything will be solved," Sanan Kachornprasart told Thai television.