The Labor Party has set course for a high-stakes leadership showdown - its fourth since winning office in 2007.

Labor MPs will vote in a ballot shortly for either Julia Gillard or Kevin Rudd to be prime minister.

Both candidates have vowed to quit politics at the next election if they lose the ballot.

Labor powerbroker and senior minister Bill Shorten has withdrawn his support for Ms Gillard, saying Mr Rudd is Labor's best chance of holding on to government.

It is a stunning turnaround for the right faction leader, who played a pivotal role in the ouster of Mr Rudd three years ago - almost to the day.

Follow our live blog for updates as they happen.

Announcing his decision to contest the ballot, Mr Rudd said he would resign if his challenge was unsuccessful.

"If I lose of course I would announce I would not contest the next election and I thank Julia for making the same commitment," he said.

Mr Rudd said he takes "full responsibility" for recanting on previous commitments not to challenge.

"I do not seek to fudge the fact that I have changed my position," he said.

Key points: Prime Minister Julia Gillard calls Labor leadership ballot for 7:00pm AEST

Prime Minister Julia Gillard calls Labor leadership ballot for 7:00pm AEST Ms Gillard demands any losing candidate leave the parliament

Ms Gillard demands any losing candidate leave the parliament Former prime minister Kevin Rudd announces he will contest the leadership and vows to leave parliament if defeated

Former prime minister Kevin Rudd announces he will contest the leadership and vows to leave parliament if defeated Mr Rudd says he is contesting leadership to boost electoral chances and prevent Coalition from winning election

Mr Rudd says he is contesting leadership to boost electoral chances and prevent Coalition from winning election No other candidates have publicly nominated for the leadership

No other candidates have publicly nominated for the leadership Leadership change would leave the future of the minority Government uncertain, dependent on crossbench support

"I leave it to you the good people of Australia to judge whether I have made the right call."

He said he had been under pressure from backbenchers to make a move on Ms Gillard.

"The truth is many, many MPs have requested me for a long, long time to contest the leadership of the party because of the parlous circumstances we now face," Mr Rudd said.

"And less politely perhaps, various ministers have been free and frank in their public advice to me as to the desirability of contesting the leadership in recent days.

"For the nation's sake I believe it's time for this matter be resolved."

But he said the main motivating factor rested with the tens of thousands of "ordinary Australians" who have also been asking him to take back the leadership.

"And it's your voices, the voices of the Australian people, it's those voices that have had a huge effect on me, more so than most of the voices I happen to hear around the corridors of this building," he said.

Sorry, this video has expired Rudd will contest leadership ballot

He said he wants to give Australians a "real choice at this election".

"The truth is if we're all being perfectly honest right now is that we are on course for a catastrophic defeat unless there is change," he said.

"So today I'm saying to you, the people of Australia, I'm seeking to respond to your call that I've heard from so many of you to do what I can to prevent Mr Abbott from becoming prime minister."

He also pledged to heal Labor's divisions if he returns to the leader's job.

"If I win this ballot every effort I have in my being will be dedicated to uniting the Australian Labor party - no retributions, no paybacks, none of that stuff," Mr Rudd said.

"It's pointless. It's old politics."

Gillard called spill after Rudd backers circulate petition

Earlier today, the ABC learned that Mr Rudd's backers had been circulating a petition to MPs to force a special Caucus meeting to hold a ballot.

Ms Gillard, who ousted Mr Rudd from the Lodge three years ago, says she has not seen the petition nor has she been approached by Mr Rudd to spill the leader position.

But she called on the ballot in a move seen as trying to cut off his opportunity to secure more votes.

Ms Gillard said she will "most certainly" stand for the leader's position, and has laid down a stunning condition.

"We cannot have the government or the Labor Party go to the next election with a person leading the Labor Party and a person floating around as the potential alternate leader," she told Sky News.

"Anybody who enters the ballot tonight should do it on the following conditions: that if you win you're Labor leader; that if you lose you retire from politics."

She said if she loses the ballot she will "absolutely" retire from politics at the next election.

"I think that that is the right thing to do for the nation and for the political party I lead, and that I hope to lead following the ballot," she said.

"I have been in a political contest with the Leader of the Opposition but I have also been in a political contest with people from my own political party.

Sorry, this video has expired Gillard calls ballot for Labor leadership

"No leader should be in that position, certainly no leader should be in that position in the run-up to an election."

She laid down a challenge to Mr Rudd to step up and contest the leadership in the ballot.

"Anybody who believes that they should be Labor leader should put themselves forward for this ballot," she said.

"This is it. There are no more opportunities. Tonight is the night and this is it."

This week is the last sitting week for federal Parliament before the election, and therefore the final chance for Labor MPs to decide the leadership question.

Entrenched poor polling and the threat of an historic loss at September's election has put Ms Gillard's leadership under sustained pressure in recent days.

Shorten switches support from Gillard to Rudd

Mr Shorten is backing Mr Rudd, after last week saying he would continue to support Ms Gillard and did not believe there would be a change of leaders.

"I have now come to the view that Labor stands the best chance to defence the legacies of this term of government and to continue improving the lives of millions of Australians if Kevin Rudd is our leader," he said.

The switch in support by the man seen as the "turnkey" in Labor's leadership standoff will give a significant boost to Mr Rudd's chances.

Sorry, this video has expired Bill Shorten declares for Kevin Rudd

"I understand that this position that I've adopted may come at a personal cost to myself. It has weighed heavily on my mind in recent weeks," he said.

"I am a great admirer of our Prime Minister Julia Gillard, I have supported her loyally for three years, I believe she has accomplished remarkable things.

"The future of this nation and the Labor party is at stake here, therefore I shall be supporting Kevin Rudd tonight."

Mr Shorten says if Ms Gillard wins, he will resign as minister.

"It is my personal conviction that the best interests of the Australian nation and the Labor party must come first, not debates about factions and personalities," he said.

"I believe that Kevin Rudd being elected tonight provides the best platform for Labor to be competitive at the next election."

Crossbench support vital to possible Rudd government

If Mr Rudd wins a ballot the future of the minority Government would be unclear.

He would need to guarantee support on the crossbench to maintain Labor's tenuous hold on power.

The Greens, who hold one crucial seat in the Lower House, say any new Labor leader would need to prove they have the confidence of the House of Representatives through either a vote in Parliament or an early election.

Earlier, independent MPs Tony Windsor and Rob Oakeshott both announced they would resign from politics at the election.

They said Labor could not take their votes for granted.

"When the arrangement was made with Julia Gillard (in 2010), it was made with Julia Gillard," Mr Windsor said.

"If Labor can't get their mess together, there may be a scenario where the second placegetter, a bloke called Tony Abbott, would in fact receive my vote."

Independent Bob Katter has said he would support a Rudd government.

A likely option in the event of a comeback by Mr Rudd is that he would call an early election and immediately launch into a campaign.