Embattled Labor figure Michael Daley, who led the party to an election loss, has pulled out of the NSW Labor leadership race, saying he does not want to be a "distraction" during the federal election campaign.

Mr Daley on Monday stepped aside as Labor leader with the intention to renominate for the leadership when the ballot is held after the federal election, expected in May.

Penny Sharpe and Michael Daley at a media conference on Monday after Labor's election loss. Credit:AAP

But on Tuesday he said he would pull out altogether, saying he did not want to be a "distraction" and that after the state election loss, he wanted the NSW Labor party to clear the air and install a new leader.

"I have always put the interests of the party first and in making this decision, continue to do so," Mr Daley said in a statement.