TED Baillieu has quit as Premier of Victoria and Leader of the Victorian Liberal Party.

Mr Baillieu made the announcement after a snap Liberal party meeting was called at 7pm in Parliament.

The meeting lasted about 20 minutes and applause could be heard throughout.

At 9.51pm, Mr Baillieu was seen entering Government House to resign his commission as premier.

And at 10.40pm, Victoria's racing minister Denis Napthine was sworn in to the top job.

Melbourne's Lord Mayor Robert Doyle this morning said Mr Baillieu’s fall wasn’t "just about Geoff Shaw".

"I don't accept that it's just about Geoff Shaw because, you know, that problem hasn't been resolved for Denis (Napthine), it's still there, so they’re in exactly the same position just with a different bloke at the steering wheel," Cr Doyle told 3AW.

Cr Doyle agreed it would be "bizarre" if Mr Shaw and Tristan Weston were behind Mr Baillieu’s "gut-wrenching" decision.

"If that’s the case, then a couple of minnows have brought down a great white shark," he said.

Cr Doyle said Mr Napthine wasn't a "stop-gap" Premier.

media_camera Ted Baillieu avoids the cameras as he heads into Government House to officially resign as premier. Picture: Ian Currie

"He wouldn't step up as any stop-gap, he has a long line of experience and he's a different bloke from the one that was (Opposition) leader in 2000," Cr Doyle said.

"He will be a very strong and capable Premier."

Mr Baillieu last night announced: "This evening I have tendered my resignation as leader of the Parliamentary Liberal Party in Victoria and I will shortly visit the Governor to tender my resignation as the Premier of Victoria.

"Can I say I love this state, I love the Liberal party and I love this role that I have had the honour to enjoy over the last two and a bit years.

"I have appreciated the honour immensely of being the leader of the Parliamentary Liberal Party over the last seven years but it is apparent to me that a change of leadership is in the best interests of the government."

Mr Baillieu revealed Dr Napthine would be the new Liberal Party leader and Premier of Victoria.

"I want to put my full support behind the new leader of the Parliamentary Liberal Party Denis Napthine and to indicate that I will be staying on in Parliament to support him."

Dr Napthine is Minister for Major Projects. He is also the Minister for Ports, Minister for Regional Cities and Minister for Racing.

He paid tribute to Mr Baillieu saying he was "proud to have served in his government".

"Ted Baillieu certainly served the state very well," he said.

"I am honoured and proud to say he is not just a colleague but a great friend."

He said he was proud to lead the party.

"I look forward to providing strong, stable and positive government for the people of Victoria."

Big Ted walked instead of fought. Blog with Susie O'Brien

During the shock resignation speech, Mr Baillieu was brought to tears as he thanked his staff and family for their support.

"I want to thank the Deputy Premier Peter Ryan in particular, members of the National Party and the Coalition team, I want to thank the members of the Cabinet," he said.

"I want to thank also all my very special friends, timeless friends who shall remain nameless and I want, of course, to thank my wife Robyn and our three children, I also want to thank my extended family. I am sure I will be having a good close cuddle with many of them later this evening."

Ted Baillieu - A life in politics

media_camera New Premier Denis Napthine at Government House swearing in with Governor Alex Chernov to his immediate right. Picture: Ian Currie

Mr Baillieu paid tribute to the legacy of the Victorian state.

"Victorians enjoy a legacy I believe unmatched across this country, unmatched across the world and its an honour to stand in this room and understand that over 160 years this Parliament has represented not just a beacon of democracy but also an icon of what's possible.

"The core character of Victorians is one of aspiration and ambition and Victorians have since first settlement days...demonstrated that core character over and over again."

Mr Baillieu said the multicultural community it enjoys was it's strength.

"Above all I want to thank the people of Victoria for the trust they placed in me over several years, particularly those who were good enough to afford us the opportunity to be in Government in 2010."

Prime Minister Julia Gillard pledged to work with Dr Napthine for the good of Victoria and wished Mr Baillieu the best for the future.

“The resignation of Victorian Premier Ted Baillieu tonight is significant news for all Victorians,” Ms Gillard said.

“This decision must have been a very difficult one for Mr Baillieu and for his family. I wish Mr Baillieu all the best for the future.”

“I will seek to work in the interests of all Victorians with Mr Baillieu's successor, Denis Napthine.”

media_camera Ted Baillieu at Melbourne Parliament Picture: Alex Coppel

Opposition leader Tony Abbott also thanked Mr Baillieu for his service to the people of Victoria.

"For the last two years Ted has worked hard to address the problems left behind after 11 years of Labor neglect," he said. "Ted has put Victoria’s finances on a sustainable footing and made significant investments in the infrastructure the state so desperately needs.

"In recent months Ted has successfully taken the fight to the federal government after Julia Gillard ripped $1.6 billion out of Australia’s public hospitals.

"I have worked closely with Ted Baillieu over the last few years. Ted is a man of integrity and honour and I wish him well for the future.

"I congratulate Denis Napthine on his election as leader of the Victorian parliamentary Liberal Party and I look forward to working closely with him."

Mr Baillieu's resignation comes as Geoff Shaw, who earlier today quit the Liberal Party, released a statement saying Victorians had lost confidence in the Baillieu leadership.

He said: "This morning I advised the Premier of Victoria of my resignation from the Parliamentary Liberal Party, effective immediately.

"As always my focus is on how I can best represent the people of Frankston and at the moment I believe that is from the cross bench.

"Labor left Victoria in a mess and Victorian’s elected a Coalition Government to fix the problems and build for the future.

"While the government has made significant progress in that direction, I believe my actions reflect the general loss of confidence Victorians are feeling in the leadership of the government."

Earlier, Deputy Premier Peter Ryan had defended the Premier saying he was "made for the job".

High time for leadership

Editorial: Suddenly, it was all over

Editorial: Napthine has trials to come

Mr Baillieu's leadership had been in the spotlight for his handling of the secret police tapes revealed by the Herald Sun on Monday.

Mr Ryan, who fronted the media this afternoon said the police crisis tapes were in the hands of IBAC, who will make a decision in due course.

"He (Premier Ted Baillieu) is doing a magnificent job on behalf of Victoria,” he said.

“He is the Premier of a government which now has the most successful economic performance in the nation according to the ratings agencies.

media_camera Ted Baillieu makes his way out of Parliament in Melbourne after resigning as Victoria's Premier and Liberal leader. Picture: Alex Coppel

“It is an outstanding performance in very difficult circumstances and we intend to ensure, we continue to govern Victoria under the Premiership of Ted Baillieu.”

Emerging from a special Coalition party room meeting this morning, Mr Baillieu said the Coalition will continue to govern.

"I can tell you as I am sure you are aware Geoff Shaw has resigned as a member or the parliamentary Liberal Party," Mr Baillieu said.

"That means that he will, I understand, I haven't spoken to him but others have, that he will sit on the cross benches.

"He has, as I understand, indicated that he may not be here for today... but that aside, the government will continue to govern and we will continue to govern decisively in Coalition and we are looking forward to doing just that."

Mr Baillieu said he was confident the parliament would continue to be workable and said he hasn't spoken to the Governor.

"I'm not going to get into the details of what might or might not happen, what I can tell you is that we are committed, we have a very strong forthcoming agenda and we have been able to govern with a narrow margin and I believe we can continue to govern and we will continue to govern," he said.

Mr Baillieu said Mr Shaw hadn't given any reasons for his departure.

"He has provided us with a very short letter and I think in that letter he indicates he wants to do this in the interest of his electors," he said.

media_camera Victorian State Parliament. Premier Ted Baillieu resigns. New Premier Denis Napthine leaves the meeting. Picture: Ian Currie

Opposition Leader Daniel Andrews earlier said the government was in crisis.

"There is no one in the Baillieu Government today thinking about jobs, or hospitals or transport or schools, this is a government that has stopped governing," he said.

"The Premier is not so much running a government as running a complete and utter circus, it'd be funny if it weren't so serious."

Liberal Party colleagues yesterday admitted they were also "despairing" over the police crisis tapes ordeal.

The tapes, which were secretly recorded, and later obtained by the Herald Sun revealed a secret payout and job help for a former adviser that forced Mr Baillieu to refer to his chief of staff and party boss to IBAC.

In May, the Sunday Herald Sun revealed claims Mr Shaw's parliamentary car had been used to frequently undertake long-distance deliveries for his private business.

Earlier today, Mr Ballieu distanced himself from the police tapes crisis, saying he had complete confidence in the pair involved - his chief of staff Tony Nutt and Liberal Party chief Damian Mantach.

"I don't know, and I can't make assumptions about the provenance or the origin of this material," Mr Baillieu said on Neil Mitchell's program on 3AW today.

"Nor do I know if this material has been previously supplied to the OPI or Ombudsman.

media_camera Geoff Shaw takes in Question time yesterday. Picture: Norm Oorloff

"The successor is IBAC and it is appropriate that they examine this material and assess whether any further consideration is required."

However, Mr Baillieu said he had referred the tapes to the Independent Broad-based Anti-Corruption Commission.

"I provided the information to IBAC, I've asked them to assess whether the matter requires further consideration," he said.

"IBAC has power to refer matters to other bodies, including Victoria Police and the ombudsman, as it seems fit."

He said he had not asked Mr Nutt to stand down, nor had he offered to stand aside while IBAC investigated the matter.

"I don't agree with standing down Tony Nutt," he said.

Mr Baillieu said he had now read "slabs" of the transcripts, published on the heraldsun.com.au on Monday.

The Premier said he agreed that a third person on the tapes, Police Minister Peter Ryan's former adviser Tristan Weston, had gone through a difficult time personally and that his position had became untenable due to the OPI report.

The lack of action by the leaders of the Coalition has been slammed by the State Opposition, who accuse Mr Baillieu of running a "complete circus".

media_camera Deputy Premier Peter Ryan congratulates new Premier Denis Napthine. Picture: Ian Currie

In Parliament, the Deputy Premier stood by his original testimony to the OPI over the police command crisis - which has been disputed in the secret tapes - saying it was Mr Weston who was found to be at fault.

Mr Ryan said Mr Weston had been severely censored or "excoriated" by the OPI.

"I, at all times, co-operated very appropriately with the Office of Police Integrity. At all times I have told the absolute truth," Mr Ryan told parliament.

During Mr Ryan's attack on Mr Weston, Mr Ryan's former parliamentary secretary, Bill Tilley, was comforted by Liberal MP Christine Fyffe.

- with James Campbell, Annika Smethurst and Michelle Ainsworth