NSW Labor leader Michael Daley has announced that he will be standing aside as the state's Opposition Leader until the upcoming federal election is over, calling it "the right and proper thing to do".

Key points: Mr Daley said he was stepping down to avoid becoming a distraction

Mr Daley said he was stepping down to avoid becoming a distraction The NSW leadership ballot will take place after the federal election

The NSW leadership ballot will take place after the federal election Labor sources have told the ABC Chris Minns and Jodi McKay will contest the ballot

Mr Daley said he would recontest the leadership.

Earlier on Monday, the party confirmed it wanted to wait until after the federal election to hold a ballot to decide who would lead it at state level.

Labor's deputy leader Penny Sharpe will act as the interim leader until the ballot is conducted.

In a statement, Mr Daley confirmed that the leadership ballot — which required a vote of the rank-and-file membership — would only begin once the federal election was held.

"This is the right and proper thing to do," he said, adding that it was "in keeping with the spirit of the State Labor Party's Caucus rules".

"To do otherwise would be an unnecessary distraction from the task of electing a Shorten Labor Government in a few weeks' time.

"I will be contesting the leadership when nominations are called for that position."

At a media conference Mr Daley said he was stepping aside now "so that I'm not a distraction and so that no one gets an unfair advantage."

"I wouldn't be indicating that I'm going to nominate if I didn't think I could win."

Mr Daley has been Opposition Leader for only 19 weeks, after replacing Luke Foley.

Labor had been neck-and-neck with the Liberals in the polls but suffered a disastrous final week of campaigning.

Mr Daley was forced to apologise after a video emerged of him telling a Labor function last year that young people were leaving Sydney because "Asians with PhDs" were taking their jobs.

Then, during the final televised election debate, he was unable to recall how much some of his party's signature education policies would actually cost.

Mr Daley said he would shoulder his "fair share of the responsibility, but others made mistakes as well".

"I picked up the pieces that the party was in four months ago and I worked as hard as I could for four months.

He said most leaders were given four years to establish themselves.

"The people that know me know that I am not a racist, that I am a progressive person," Mr Daley told the media conference.

"I was the first to admit that those comments were poorly worded I should've chosen my words better."

Ms Sharpe said she could "guarantee that I will not nominate for the leadership of the party".

"By the end of June you'll know.

"This is unchartered waters — we'll see how we go — but I'm actually very confident and really quite calm about the way we'll deal with this."

Federal Labor Senator for NSW Jenny McAllister said: "Michael's made his own decision and presumably he'll have his own reasoning for it".

"I think the most important thing now for everyone in NSW is to focus on the federal campaign."

She said the party had "a very bad week in the last week of the campaign and we needed everything to go right".

Mr Daley had only 132 days in the leadership and the "very significant mistakes" made in that last week "made it very, very difficult for any other message to get through to voters right at the end".

Party insiders on Sunday told the ABC Shadow Water Minister Chris Minns will run against Mr Daley, while Shadow Transport Minister Jodi McKay could also put her hand up for the top job.

The comments about immigration were particularly damaging for challenger Mr Minns, who has a high Chinese-Australian population in his Sydney seat of Kogarah.