Mr O'Neill, who has been in office for seven years, has faced calls for his resignation for weeks over a range of issues.

But after several more defections on Friday he accepted he did not have the support to continue.

Mr O'Neill, 54, said he would hand over office to former PM Sir Julius Chan.

"It is important that we maintain a certain amount of stability. We have heard the calls and we have agreed for a change of government," Mr O'Neill told reporters in the capital Port Moresby, according to Papua New Guinea (PNG) broadcaster EMTV.

Sir Julius said he wanted a smooth transition to ensure stability in the South Pacific nation of 7.3 million people.

"I want to thank the Prime Minister Peter O'Neill for all that he has done to bring this country (to where it is) today," he told journalists.

"Men and women of Papua New Guinea... we have very short memories. Tomorrow you will look back and see all the things that he has done. But like life itself, you have just got to move on."

Mr O'Neill has been under pressure over a range of issues, including a multi-billion-dollar gas project signed earlier this year with French company Total and the US firm ExxonMobil.

Although the project would almost double PNG's gas exports, local communities have raised fears that they would be excluded from the benefits.

BBC

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