Julia Gillard says she is "very honoured" to become Australia's first female prime minister, after Kevin Rudd stood down in tears as Labor leader at a caucus meeting this morning.

Ms Gillard, not Mr Rudd, will now decide when to lead her party into the next election.

Mr Rudd, who made "a very gracious speech," stood aside to avoid a humiliating defeat.

Newcastle Herald NEXT PM: Julia Gillard challenged Kevin Rudd for the Australian leadership - and won.

Treasurer Wayne Swan was elected deputy leader unopposed, Senator Michael Forshaw announced after the caucus meeting.

Sources said Mr Rudd was reduced to tears as he addressed his colleagues and announced his decision to stand aside as leader.

Mr Rudd ignored questions from reporters as he left the caucus room.He was accompanied by senior ministers John Faulkner and Kim Carr and Queensland backbencher Jon Sullivan.

Reuters STOOD DOWN: Prime Minister Kevin Rudd will hand over the leadership reins to Julia Gillard.

JOHN KEY

Prime Minister John Key spoke to the new Australian PM Julia Gillard at about 12.30pm today and passed on his congratulations.

"Our relationship with Australia is a critical one and our most important with any country, and I look forward to working with Julia Gillard to advance that relationship," he said.

Mr Key also acknowledged Mr Rudd with whom he said he had a "constructive relationship.

"He has always been a gracious host when I have visited Australia, and our discussions have always been ones I have enjoyed."

He hoped to talk to Mr Rudd later today. Mr Key first met Ms Gillard in 2008 when she came to New Zealand for the Australia-New Zealand Business Leadership Forum.

"I am confident that the very close relationship between the two countries will remain strong.

Mr Key said he was the first prime minister to ring Ms Gillard "and I think that's a sign of the depth and strength and the significance of the relationship between New Zealand and Australia."

He admitted being surprised by the speed of the change.

"I guess there had been a sigjn that the polls had been difficult for Kevin the last few months but that's not unique in politics and he'd obviously been a highly regarded and well loved prime minister of Australia."

Next week's scheduled visit by the Australian Prime Minister to New Zealand has now been cancelled.

POPULARITY DIVE



Just a year ago, Mr Rudd rivalled Bob Hawke as Australia's most popular leader. But he now joins Mr Hawke as the only other Labor prime minister dumped by his party.

Mr Rudd had decided to fight to the death after refusing to step aside last night for Ms Gillard.

Ms Gillard, however, was believed to have to the numbers before going into this morning's ballot, which was not held. She also had the backing of the powerful Australian Workers Union.

A series of policy failures, poor polls and the decision to go to war with the mining industry have all contributed to Mr Rudd's plunging fortunes among his colleagues.

The Coalition fears a change to Ms Gillard. Although she bears responsibility for many of the government's poor decisions, including shelving the emissions trading scheme and the school buildings program, she would be harder to beat than Mr Rudd.

The push to oust Mr Rudd was driven by the Right faction in Victoria and South Australia.

The entire national Right, including the NSW Right and its kingmaker Mark Arbib, had last night swung behind Ms Gillard, as had the Victorian Left, led by Kim Carr, who installed Mr Rudd.

The hard Left was left doing the numbers for Mr Rudd.

After a three-hour crisis meeting in his office last night with Ms Gillard and the veteran fixer John Faulkner, Mr Rudd held a media conference and said he would fight.

"I was elected by the people of Australia as the Prime Minister of Australia," he said.

"I was elected to do a job and I intend doing that job."

But he had acknowledged that he was abandoned by most of the factional powerbrokers.

Mr Rudd had attempted to salvage votes by promising to bring a speedy conclusion to the mining tax saga and initiate a timetable to implement an emissions trading scheme.

After being pressured to take a hard line against asylum seekers, he baulked, saying he would not engage in a race to the right.

The push to oust Mr Rudd was led by the Victorian senator David Feeney, the Victorian MP Bill Shorten, and the South Australian senator Don Farrell, all right-wing heavyweights.

Sources said they met Ms Gillard yesterday afternoon in an attempt to persuade her to stand.

She was reluctant.

But the Agriculture Minister, Tony Burke, and Senator Arbib met Ms Gillard separately to urge her to move.

Senator Arbib and Ms Gillard were instrumental in forcing the government to abandon the emissions trading scheme, which was the catalyst for the government's slide in the polls.

The move against Mr Rudd was sparked by a report in yesterday's Herald that Mr Rudd had used his chief of staff, Alister Jordan, to sound out the backbench over the past month on the level of support for him. This followed a Herald/Nielsen poll which showed the government would lose if an election were held then.

But Mr Rudd's action was regarded as a sign that he did not trust the repeated assurances by Ms Gillard that she would not stand.

"It was offensive and disloyal," said a Gillard supporter.