Martin Schulz, the passionately pro-EU SPD leader, vowed not to enter a grand coalition with Angela Merkel's CDU/CSU bloc in the immediate aftermath of the Bundestag election, which took place last September, but performed a U-turn - under pressure from senior party members and Germany's president Frank-Walter Steinmeier - after Mrs Merkel's efforts to form a three-way coalition with the pro-business Free Democrats and the Green party failed in November.
Though the executive committee endorsed Nahles' candidacy for the leadership position, her future will also depend on the outcome of the membership vote.
Schulz said an extraordinary party congress would be held in the western city of Wiesbaden on April 22 to pick a new leader.
"With my resignation from office and decision not to participate in the government, I want to bring the personnel debate in the SPD to an end so that the members can really concentrate on what is in the coalition agreement", Schulz told reporters.
Amid a swift leadership transition, Germany's Social Democrats (SPD) sank further into chaos on Tuesday after the party agreed to a coalition deal with Chancellor Angela Merkel's conservatives.
Nahles, 47, shot to national political fame during the fraught days of the last SPD government 15 years ago when, as a left-wing lawmaker, she helped lead a party rebellion against its tough social reforms.
With many SPD rank and file harboring misgivings about sharing power with Merkel again, the result of the vote, due on March 4, is wide open. The Berlin branch of the SPD also opposes Nahles's appointment as caretaker leader.
Still, the turmoil at the top of the party has angered many SPD stalwarts who accuse the party leadership of putting their own careers ahead of the party's interests.
Tensions are also reported between him and Sigmar Gabriel, an SPD colleague who is now foreign minister.
Opponents from the SPD to a new coalition have been campaigning under the slogan: "Join, and say no".
"If I can contribute to that by resigning, it will have been worth it", he said outside the SPD headquarters. If party members reject the agreement, the new coalition government can't be formed.
In a cartoon on Tuesday, the Sueddeutsche Zeitung daily showed Nahles with a whip riding an SPD snail.
That leaves open who from within the SPD may take up that post.
Michael Fuchs, a former member of parliament with Merkel's Christian Democratic Party (CDU), said he is optimistic that Germany's finances will continue to be run efficiently.
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