"In view of the uncertainty that results of this nature unavoidably will lead to... I have decided not to seek re-election as leader of the Independence party at its upcoming national congress."
The prime minister said the operation would be carried out abroad at the end of this month.
There have been regular demonstrations in Reykjavik after Iceland's currency plummeted following policies by its banks which incurred billions of dollars worth of foreign debt.
The prime minister's announcement came after the latest protest in the capital this week, where demonstrators threw rocks and shoes at parliament and surrounded Haarde's car pelting it with eggs.
Earlier on Friday, Haarde had met senior members of his party to discuss demands for a spring election from Ingibjorg Gisladottir, the country's foreign minister and head of the junior party in the ruling coalition.
A national election is not legally required in Iceland until 2011.