Former NSW Opposition leader Michael Daley has pulled out of the race for the party's leadership, after Labor lost the state election.

Key points: Mr Daley yesterday announced he was stepping down but would contest the NSW Labor leadership after the federal election

Mr Daley yesterday announced he was stepping down but would contest the NSW Labor leadership after the federal election He now says he will abandon the race after consulting with his colleagues and family

He now says he will abandon the race after consulting with his colleagues and family Opposition water spokesman Chris Minns is expected to put his hand up for the job

Mr Daley yesterday announced he would stand aside, but insisted he would still contest the leadership when a ballot was held after the upcoming federal election.

In a brief statement, the Maroubra MP today announced he made the decision not to contest the leadership after consulting colleagues and his family.

He said he did not wish to be "a distraction" during the looming federal election campaign and that the NSW party required "clear air" for the selection of a new leader.

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

Mr Daley said he intended to remain the Member for Maroubra but would be taking leave for the next few weeks to spend time with his family.

Penny Sharpe was yesterday announced as the interim leader.

Opposition water spokesman Chris Minns is expected to run for the position, while Transport spokeswoman Jodi McKay could also throw her hat into the ring.

Under Labor rules, selecting a new leader will require a vote of the party's rank-and-file membership, as well as MPs.

That process will start only once the federal election has been held.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 2 minutes 4 seconds 2 m 4 s Michael Daley to stand aside as Labor leader ahead of ballot

Labor held 34 seats heading into the election and needed 13 more to form a majority government.

But it only managed to pick up Coogee and Lismore.

One of the final seats considered in doubt, Dubbo, is likely to be retained by the Nationals — delivering the Coalition a 47th seat and a majority.

When he announced he was stepping aside, Mr Daley said he didn't want to have an "unfair advantage" prior to nominating for the leadership role.

He was the Opposition leader for only 19 weeks after replacing Luke Foley last year.

Mr Daley seized much of the attention and momentum early in the state election campaign, focusing attention on the Sydney Football Stadium's controversial demolition and rebuilding.

But he stumbled badly during the final week of campaigning.

Mr Daley was forced to apologise after a video emerged of him telling a Labor function last year that young people were leaving Sydney and being replaced by "Asians with PhDs".

He was then unable to recall a key figure of Labor's signature education policy during a live television debate.

Mr Daley has said he takes his "fair share of the responsibility", but that "others made mistakes as well".