According to Nine's political reporter Lane Calcutt, Mr Turnbull's party remains divided and his authority is diminished.
The deputy leadership was also declared vacant, but Julie Bishop was the only person nominated so hung on to her role.
"Mr Turnbull blindsided his Home Affairs Minister when he brought on the vote after days of speculation and pressure on Mr Dutton to challenge". Australians are due to hold a general election early next year. "I will support what the government does, I will support what Malcolm does".
Turnbull had attempted to see off a challenge by retreating on energy policy that was contentious among the conservative wing of his party, but his backdown was not enough.
Chief government whip Nola Marino announced the close margin at the tense party room meeting which has been labelled a "humiliation" for Turnbull with a frontbench who does not support him.
Turnbull said his slim parliamentary majority and internal dissent, with some government members saying they would vote against the energy policy, left him no option but to remove the emission cuts that were part of the Paris Climate Agreement.
Mr Dutton has now resigned his powerful position as Home Affairs minister and will move to the backbench, in keeping with the tradition of cabinet solidarity.
But Treasurer Scott Morrison said was "fully supportive" of the Prime Minister.
While Coalition marginal seat holders have publicly supported Mr Turnbull, some privately lobbied in favour of Mr Dutton to improve the party's chances in Queensland.
Former Prime Minister Tony Abbott said the backflip showed his successor was willing to abandon his core beliefs.
"We can win next year if we become united and stick with Mr Turnbull", Mr Pyne said.
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