The Russian Government and its Prime Minister have resigned, hours after President Vladimir Putin proposed a constitutional overhaul that could extend his stay in power.

Key points: Mr Medvedev is a longtime close associate of Mr Putin

Mr Medvedev is a longtime close associate of Mr Putin The unexpected resignation means Russia will get a new prime minister

The unexpected resignation means Russia will get a new prime minister Mr Putin asked the members of Mr Medvedev's Cabinet to keep working until a new one is formed

Prime Minister Dmitry Medvedev submitted his resignation hours after Mr Putin discussed the constitutional amendments during his annual state-of-the-nation address on Wednesday (local time).

During his speech, Mr Putin proposed amending the constitution to increase the powers of prime ministers and Cabinet members.

The proposed move is seen as part of Mr Putin's efforts to carve out a new position of power for himself to stay at the helm after his current term as president ends in 2024.

In televised remarks, Mr Putin said Mr Medvedev would take up a new position as a deputy head of the presidential Security Council.

Mr Medvedev, a longtime close associate of Mr Putin's, has served as Russia's prime minister since 2012.

He spent four years before that as president in 2008-2012, becoming a placeholder when Mr Putin had to switch into the prime minister's office because of constitutional term limits on the presidency.

Mr Medvedev obediently stepped down after just one term as president and let Mr Putin reclaim the top job in what was widely seen as cynical political manoeuvring, triggering massive protests in Moscow.

The unexpected resignation means Russia will get a new prime minister.

Who will replace Medvedev?

The Kremlin-dominated lower house of parliament is due to decide whether to approve Mr Mishustin as Russia's next prime minister. ( Reuters: Sergei Karpukhin )

Tax chief Mikhail Mishustin was Mr Putin's surprise choice to become Russia's new prime minister.

With almost no political profile, analysts say Mr Mishustin could be a "technocratic placeholder".

The Kremlin-dominated lower house of parliament, which rarely opposes Mr Putin on important issues, is due to decide whether to approve Mr Mishustin on Thursday.

Mr Mishustin, 53, has been the head of the Federal Tax Service since 2010 and has worked in government roles related to tax collection since the early days of his career.

He has won praise for improving tax collection processes and more than doubling tax revenues in the past decade, with 20.4 trillion roubles ($471 billion) collected in the first 11 months of last year.

The majority of those revenues still come from taxes on the vast energy sector but an increasing share now comes from other forms of taxation after an efficiency drive.

Despite these successes, Mr Mishustin's name had not appeared in many lists of potential candidates for the post.

Mr Putin asked the members of Mr Medvedev's Cabinet to keep working until a new one is formed.

'Serious changes to the political system'

Critics have long accused Mr Putin of plotting to stay in power. ( Reuters: Aleksey Nikolskyi/Kremlin )

Mr Putin told Russia's political elite during the speech that he favoured changing the constitution to hand the State Duma, the lower house of parliament, the power to choose the prime minister and other key positions.

"These are very serious changes to the political system," Mr Putin said.

"It would increase the role and significance of the country's parliament … of parliamentary parties, and the independence and responsibility of the prime minister."

Critics have long accused Mr Putin of plotting to stay on in some capacity to wield power over the world's largest nation after he steps down.

He remains popular with many Russians who see him as a welcome source of stability even as others complain that he has been in power for too long.

Mr Medvedev's resignation took Russian markets by surprise. The rouble and stocks suffered sharp losses before rebounding to make gains amid the uncertainty.

Mr Putin told Russia's political elite that the changes would increase the role of the country's parliament. ( AP: Dmitry Astakhov )

During his speech, Mr Putin also announced measures to boost Russia's birth rate, describing the measures as vital to the country's future though they are projected to cost at least $US6.5 billion ($9.4 billion) this year alone.

He said the demographic situation was "very difficult", proposing payments for low-income families with small children, allowances for first-time mothers, higher payments for families with more children and the creation of more places in nurseries.

"Our historic duty is to respond to this challenge," Mr Putin said.

"Russia's fate and its historic prospects depend on how many of us there are … it depends on how many children are born in Russian families in one year, five, 10 years, on what they will grow up to be," he said.

Russia's population fell dramatically in the 1990s in the tough economic and social climate after the collapse of the Soviet Union, and Mr Putin has faced demographic problems for much of the time since he became president in 2000.

Previous attempts to improve the situation have been unsuccessful, causing concern among economists about what the impact of having a smaller workforce will be on the economy.

AP/Reuters