The prime minister returned to his political roots in the north east for his swansong, telling supporters at Trimdon Labour club he would stand down as PM on June 27. He will tender his resignation to the Queen on that day.

In an emotional 17-minute speech, he said the judgment on his 10-year administration was "for you, the people, to make". Mr Blair paid special tribute to his wife and children "who never let me forget my failings".

And he apologised for "the times I have fallen short".

But he concluded: "Hand on heart, I did what I thought was right. I may have been wrong - that's your call. But I did what I thought was right for our country.

"This country is a blessed country. The British are special. The world knows it, we know it, this is the greatest country on earth."

In Washington, president Bush said Mr Blair was a "remarkable person. And I consider him a good friend."

He added: "When Tony Blair tells you something - as we say in Texas - you can take it to the bank.

"He's a political figure capable of thinking over the horizon. He's a long-term thinker."

Mr Brown, who led tributes to Mr Blair at this morning's cabinet meeting, said: "I think I spoke for millions of people when I said to the cabinet today that Tony Blair's achievements are unique, unprecedented and enduring."

He praised Mr Blair's responses to the 9/11 terror attacks and the death of Diana, Princess of Wales. "At all times he tried to do the right thing," said the chancellor.

In his speech to supporters at lunchtime, Mr Blair dealt directly with Iraq, many people's perception as his ultimate legacy, saying: "The blowback since ... has been fierce, unrelenting and costly."

But he insisted: "The terrorists will never give up if we give up."

Although he did not mention the US president by name, he made clear the importance he had attached throughout his premiership to the so-called "special relationship", saying Britain should "stand shoulder to shoulder with our oldest ally, and I did so out of belief".

Mr Blair admitted that in May 1997, when Labour took over after 18 years of Tory rule, "expectations were too high".

But he added: "I would not want it any other way. I was, and remain, an optimist."

Pointing to Africa, climate change and globalisation, he declared Britain had changed under his 10-year leadership, saying: "Britain is not a follower, Britain is a leader."

He made no reference as to whether he would stay on as backbench MP for Sedgefield.

Tomorrow Mr Blair will fly to Paris to meet the president-elect, Nicolas Sarkozy, where he is also expected to endorse Gordon Brown as his successor.

Tributes to the PM's 10 years quickly flooded in, although the Tory leader, David Cameron - in a webcast reaction - said it was "putting it mildly" to say hopes had been disappointed in Mr Blair's 10 years in office.

He added there was "so much promise and so little delivery". Mr Blair was "desperate to secure his legacy" but doing it by "sitting in Downing Street pulling levers".

The president of the EU commission, José Manuel Barroso, said the PM "took Britain from the fringes to the mainstream of the European Union".

Mr Blair acknowledged he had been accused of "messianic zeal", but said as prime minister, over issues such as Sierra Leone, Kosovo and then Afghanistan and Iraq, you were "alone with your instinct".

Simultaneously, John Prescott announced in Hull he too would be stepping down, firing the starting pistol on a deputy leadership race. Peter Hain, the Northern Ireland secretary, and justice minister Harriet Harman had both secured the necessary 44 nominations by the end of the day.

The other candidates are Hazel Blears, Hilary Benn, and Alan Johnson.

Earlier, the PM had confirmed to cabinet he would announce his plans to step down, joking it was "not quite a normal day".

The meeting ended with the entire cabinet "thumping" the table in appreciation, according to Mr Blair's official spokesman.

The two leftwing challengers for the Labour leadership, John McDonnell and Michael Meacher, were due to announce this afternoon which if either of them would stand - but postponed a press conference declaring it was "too close to call".

Meanwhile, the Liberal Democrats demanded an immediate snap election to legitimise Mr Blair's successor.

The party leader, Sir Menzies Campbell, has tabled a Commons motion calling on the Queen to dissolve parliament immediately, since Mr Blair promised to serve a "full third term" in 2005.

Mr Brown, facing a financially straitened Labour party and poor polls, is highly unlikely to grant that request.

Mr Blair was unique among Labour leaders in winning three successive elections. Although announcing before the 2005 contest he would serve a "full third term", a mini-putsch by both Blairite and Brownite backbench MPs last autumn forced him to confirm he would stand down within a year.