Gyurcsany, who said that he will officially notify parliament of his decision on Monday, is expected to initiate a "constructive vote of confidence".

Parliament will then vote the incumbent out and an agreed successor in, without the need for an early election.

"I propose forming a new government with a new prime minister,'" Gyurcsany told the congress.

Diminishing support

He said that he was honouring a pledge made in January 2008 to ring the changes if the Socialist party's popularity had failed to recover.

"A year has passed. Support for us has not grown. On the contrary, it has diminished," Gyurcsany said.

Monika Lamperth, a senior member of the Socialist party, told reporters that the Socialists would hold a party congress on April 5 to choose their candidate for the premiership.

However, Fidesz, the main opposition party, said it would not negotiate about a new government and would on Monday submit a motion to dissolve parliament.

Hungary has been heavily hit by the global financial crisis, with the economy expected to contract by 4.5 per cent this year, forcing it to take a $25.1bn loan from the International Monetary Fund and other institutions.

Gyurcsany pushed through measures to bring down the budget deficit from 9.2 per cent of gross domestic product (GDP) in 2006 to 3.3 per cent of GDP in 2008.

Coalition split

However, the tax rises and spending cuts led to a rapid loss of support which culminated in the breakup of the governing Socialist-Liberal coalition in April 2006, over disagreements on the pace of reforms.

Gyurcsany has been leading a minority government ever since.

Peter Kreko, a political analyst in Budapest, told Al Jazeera that the new government would have to make unpopular decisions to get the economy back on its feet, but the resignation would be a positive move.

"It's unavoidable that some austerity measures and reforms should be implemented," he said.

"I think that the markets should see this move as a move poiting toward a more stable country."

Gyurcsany first became the prime minister in 2004 and won re-election in 2006.

Weeks of protests followed his re-election after the leaking of an audiotape in which Gyurcsany said that he had lied about the country's poor finances to win the election.

He remains the sole candidate for the Socialist party leadership when its votes for a party chairman later on Saturday despite his resignation.