POPE Benedict XVI says he will resign on February 28 because his age prevents him from carrying out his duties, an unprecedented move in the modern history of the Catholic church.
The decision sets the stage for a conclave to elect a new Pope before the end of March.
The 85-year-old Pope announced his decision in Latin during a meeting of Vatican cardinals on Monday morning.
He emphasised that carrying out the duties of being Pope - the leader of more than a billion Catholics worldwide - requires "both strength of mind and body".
"After having repeatedly examined my conscience before God, I have come to the certainty that my strengths due to an advanced age are no longer suited to an adequate exercise of the Petrine ministry," he told the cardinals.
"I am well aware that this ministry, due to its essential spiritual nature, must be carried out not only by words and deeds but no less with prayer and suffering.
"However, in today's world, subject to so many rapid changes and shaken by questions of deep relevance for the life of faith, in order to govern the bark of St Peter and proclaim the Gospel, both strength of mind and body are necessary - strengths which in the last few months, has deteriorated in me to the extent that I have had to recognise my incapacity to adequately fulfil the ministry entrusted to me."
The last pope to resign was Pope Gregory XII, who stepped down in 1415 in a deal to end the Great Western Schism among competing papal claimants.
Father Brian Lucas, the general secretary of the Australian Bishops Conference, said Australian Catholics would be surprised to find the Pope is resigning, but will be supportive of his decision.
"I was in Rome with the president and vice president of the Bishops Conference three weeks ago and it was evident that the Pope was frail," Fr Lucas said.
"While he is certainly mentally very alert, the physical demands of the role and the travel and all that is required in the modern world has led him to reflect and pray and take this very courageous and serious decision."
Tim Fischer, Australia's first ambassador to the Holy See, said the resignation was not unexpected.
"In 2010, in the middle of my posting, the Pope said 'yes' he could resign and in certain circumstances it would be his duty to reign," Mr Fischer told AAP.
"Pope Benedict XVI tried to steer the huge ship of state of the Holy See to a better place and his seven-year papacy will be greatly respected in history."
Prime Minister Julia Gillard said Benedict's resignation marks a historic moment, which many Australian Catholics would greet with great emotion.
"On his election, Joseph Ratzinger said he wished to be 'a simple humble worker in the vineyard of the Lord' and in his resignation that humility has been amply demonstrated," she said in a statement.
There are several papal contenders in the wings, but no obvious front-runner - the same situation when Benedict was elected pontiff in 2005 after the death of Pope John Paul II.
When Benedict was elected pope at age 78 - already the oldest pope elected in nearly 300 years - he had already been planning to retire as the Vatican's chief orthodoxy watchdog to spend his final years writing in the "peace and quiet" of his native Bavaria.
Contenders to be his successor include Cardinal Angelo Scola, archbishop of Milan, Cardinal Christoph Schoenborn, the archbishop of Vienna, and Cardinal Marc Ouellet, the Canadian head of the Vatican's office for bishops.
Longshots include Cardinal Timothy Dolan of New York. Although Dolan is popular and backs the Pope's conservative line, the general thinking is that the Catholic church doesn't need a pope from a "superpower."
All cardinals under age 80 are allowed to vote in the conclave, the secret meeting held in the Sistine Chapel, where cardinals cast ballots to elect a new pope. As per tradition, the ballots are burned after each voting round; black smoke that snakes out of the chimney means no pope has been chosen, while white smoke means a pope has been elected.
Popes are allowed to resign; church law specifies only that the resignation be "freely made and properly manifested".
Benedict himself raised the possibility of resigning if he were simply too old or sick to continue on in 2010, when he was interviewed for the book Light of the World.
"If a pope clearly realises that he is no longer physically, psychologically and spiritually capable of handling the duties of his office, then he has a right, and under some circumstances, also an obligation to resign," Benedict said.
The former Cardinal Joseph Ratzinger had an intimate view as Pope John Paul II, with whom he had worked closely for nearly a quarter-century, suffered through the debilitating end of his papacy.