New South Wales Premier Barry O'Farrell says he will resign owing to a "massive memory fail" when giving evidence to the Independent Commission Against Corruption (ICAC) on Tuesday.

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Mr O'Farrell denied receiving a $3,000 bottle of wine in 2011 from Australian Water Holdings (AWH) executive Nick Di Girolamo.

The Premier also said he had no recollection of a 28-second call made from his phone to Mr Di Girolamo around the time he was allegedly sent the wine.

On Wednesday morning, ICAC heard that a handwritten note from Mr O'Farrell, thanking Mr Di Girolamo for the wine, had been uncovered.

Soon after Mr O'Farrell called a media conference in which he announced his decision to step down.

A handwritten letter and envelope from NSW Premier Barry O'Farrell to AWH executive Nick Di Girolamo expressing thanks for a bottle of wine. ( ABC News )

"I do accept there is a thank you note signed by me, and as someone who believes in accountability, in responsibility, I accept the consequences of my action," he said.

"I've accepted that I've had a massive memory fail.

"I still can't explain either the arrival of a gift that I have no recollection of or its absence, which I certainly still can't fathom, but I accept the consequences in an orderly way."

Mr O'Farrell's resignation as Liberal leader will come into effect at a partyroom meeting which has been brought forward to Thursday afternoon.

"As soon as I can organise a meeting of the parliamentary Liberal Party for next week, I will be resigning the position and enabling a new Liberal leader to be elected - someone who will then become the Premier of NSW," he said.

Political commentators have speculated either Treasurer Mike Baird or Transport Minister Gladys Berejiklian is the most likely to replace Mr O'Farrell as Premier.

On Wednesday Mr Baird said he was "shocked" by Mr O'Farrell's resignation given that he had done "an amazing job", but said the question of leadership was one for another day.

Pru Goward's office says the Liberal frontbencher is considering her options and has not ruled out running for the leadership.

O'Farrell recalled to ICAC, says note has not jogged his memory

Mr O'Farrell was recalled to ICAC on Wednesday afternoon to address the handwritten note and clarify what he told the inquiry yesterday.

He said that he still could not recall receiving the bottle, even after reading the note, which he confirmed was in his handwriting.

Mr O'Farrell said he does not remember taking possession of the bottle of Grange, which had a vintage dated from his birthday - May 24, 1959 - nor what had happened to it.

Courier documents were tendered to ICAC on Wednesday showing that the Grange turned up at Mr O'Farrell's home on April 20, 2011, and was left at the door as directed, but the Premier said that still did not jog his memory.

"The regret for me is having the letter and the envelope; it still does not spark a recollection," he said.

"I read the note and accept it is my handwriting, but I still have no recollection about receiving the wine."

However, he apologised for misleading the inquiry in evidence on Tuesday.

"I gave yesterday my best recollection of that which was clearly mistaken. I regret that," he said.

After a short stint giving evidence, Mr O'Farrell left the hearing without giving any further comment.

Mr Di Girolamo also appeared before ICAC in the afternoon and denied leaking information about the bottle of wine to the media.

Counsel assisting the commission asked him how a Daily Telegraph journalist came to know about the wine before the commission did.

Mr Di Girolamo said he had only told his wife about the purchase.

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Outside the hearing he told waiting media he did not think he was responsible for bringing down the Premier.

ICAC alleges AWH lobbied Mr O'Farrell over an agreement with the state-owned Sydney Water to roll out water infrastructure.

AWH, linked to the family of disgraced former MP Eddie Obeid, is accused of corruptly billing Sydney Water for expenses and using the money for political donations, executive salaries and various other expenses.

AWH executive Nick Di Girolamo yesterday told the inquiry he sent the Premier the wine in 2011 to congratulate him after the election.

Mr Di Girolamo had earlier told ICAC that Mr O'Farrell also phoned him to thank him for the gift.

O'Farrell showed rare honour and integrity: Tony Abbott

Prime Minister Tony Abbott said Mr O'Farrell had demonstrated "integrity" by resigning over what he said was an innocent and inadvertent misleading of ICAC.

"We are seeing an act of integrity, an act of honour, the like of which we have rarely seen in Australian politics," he said.

"I admire him tremendously for this, although I deeply regret the necessity for it."

He described Mr O'Farrell as a "friend", who had always strived to do the "right thing" by NSW.

"I have known Barry for two decades. He has been a friend of mine throughout that time," he said.

"He has been a great servant of the Liberal Party, a great servant of the people of NSW and of Australia.

"He has constantly worked to do the right thing by the people of NSW and we were together as recently as last Friday in China winning trade and jobs for our country and our state.

"Obviously, as we now know, he innocently, inadvertently misled ICAC yesterday and he has taken the utterly honourable step of resigning as Premier."

The Prime Minister said Mr O'Farrell's apparent memory lapse was understandable.

"If you're in public life, you meet lots of people; from time to time people give you things," he said.

"They might give you ties, they might give you pens, a bottle of wine and, sure, a bottle of Grange is pretty special, no doubt about that, but given that premiers and other senior politicians have very crowded, busy lives, I don't think it's reasonable to expect everything from some years ago to be front of mind."

ICAC focus should be on Eddie Obeid: Piccoli

The NSW Education Minister and Member for Murrumbidgee, Adrian Piccoli, says he is shocked by the announcement, adding that the focus of ICAC should be disgraced former MP Eddie Obeid.

"Barry has to be one of the most honest and decent people I've ever met," he said.

"He's obviously come to this decision based on actually how honest he is.

"I only know what I've seen in the media and read and heard.

"So we lose one of the best premiers we've had, over a $3,000 bottle of wine."

However, State Opposition Leader John Robertson said yesterday's events were not "about a bottle of wine" but about how the NSW Liberal Government operates.

"Today we've seen a Liberal Government in NSW that has allowed donors and lobbyists to reach into the heart of public administration in this state," he said.

Sorry, this video has expired Robertson says Liberal Government betrayed trust of voters

Mr Robertson said he had been working since the last election to help rebuild public trust in Labor, which includes new standards for accountability and transparency that he applies to his frontbench.

He said those standards should be applied across Parliament and he looked forward to working with the next Premier to achieve that.

Former NSW Liberal premier Nick Greiner, who led the party from 1983 to 1992 and set up the ICAC before ultimately being undone by one of its investigations, told The World Today that he was "stunned" by Mr O'Farrell's resignation.

He said he found it ironic based on his own resignation over an ICAC probe, even though he was later cleared.

"[But] I think the circumstances are very different. I mean, in my case the ICAC actually wrote a report, made, I think objectively, a complete botch of it and the Supreme Court said that they'd made a botch of it," he said.

"I think Barry's judgement is a very different matter. It's a political judgement.

"He gave some clear, very clear evidence yesterday which has shown to be wrong.

"I think - and he's a better political operator than I ever was - I think his judgement was that it was politically unsustainable.

"It wasn't about the bottle of wine and did he or didn't he.

"I don't think you can be shown to categorically mislead the ICAC, and then indeed the public, and then continue."