Palestinian prime minister Salam Fayyad resigned, ending months of rising tension with Palestinian president Mahmud Abbas, despite US efforts to keep him in place.
The resignation of the US-educated economist, who won broad international acclaim for his state-building efforts since becoming premier in 2007, comes just days after Washington made a fresh push to revive long-dormant peace talks.
Rumours that Fayyad would either resign or be told to step down by Abbas have been rife in recent weeks after long-standing differences between the two came to a head over the finance portfolio.
Abbas accepted Fayyad's resignation at a brief meeting at the Muqataa presidential compound in Ramallah, but officials said he had asked the 61-year-old to stay on in a caretaker role until a new prime minister can be appointed.
"Fayyad met Abbas for half an hour in the president's headquarters in Ramallah and officially handed him his written resignation," a Palestinian official told AFP.
Fayyad, a political independent, has come under increasing criticism as the Palestinian Authority lives through its worst-ever financial crisis, with Abbas's ruling Fatah movement openly deriding his economic policies as "confused" earlier this month.
But Washington has lobbied hard for the former World Bank official to be kept on.
As rumours surfaced on Thursday he was planning to resign, a senior State Department official poured cold water on the idea, saying: "As far as I know he's sticking around."
And late on Friday, US Secretary of State John Kerry phoned Abbas to urge him to find common ground with his prime minister, Palestinian officials said.
Following Saturday's developments, Washington hailed "the important roles played by both president Abbas and prime minister Fayyad" in the push towards a Palestinian state, National Security Council spokeswoman Caitlin Hayden said.
"Prime minister Fayyad has been a strong partner to the international community and a leader in promoting economic growth, state-building and security for the Palestinian people. We look to all Palestinian leaders to support these efforts."
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Long-running tensions between Fayyad and Abbas came to a head six weeks ago over the resignation of finance minister Nabil Qassis, with Fayyad agreeing to the move but Abbas, who was abroad at the time, rejecting it.
Fayyad himself was finance minister for five years from 2002, and after being appointed premier in 2007, he continued to hold both portfolios until Qassis took over in May 2012.
He was deeply unpopular with the Islamist Hamas movement which rules Gaza, with spokesman Sami Abu Zuhri accusing him of "riddling our people with debt."
Abbas's Palestinian Authority is in the grip of its worst-ever financial crisis, partly due to a shortfall in promised foreign aid, as well as by Israel's withholding of tax monies for several months, although the decision was recently reversed.
But Fayyad was widely respected by the international community, which credited him with building a sound institutional framework for the Palestinian Authority.
Although Israel made no official comment on Fayyad's resignation, the left-leaning Haaretz said senior political figures "expressed much regret" over his departure in what the paper described as "a dramatic development."
"Its ramifications won't just reverberate in the part of the West Bank under Palestinian control, but will also affect Israel and the Obama administration's efforts to renew the peace process, as well as the European Union's policy towards the Palestinians," wrote Barak Ravid.
Fayyad's departure would probably impact on foreign aid donations as well as moves announced last week by Kerry to revive the West Bank economy and remove barriers to growth, he said.
"Without Fayyad guarding the public coffers, it's not certain that the countries currently providing the Palestinian Authority with aid will continue to do so. Israel will also hesitate to promote economic measures in the West Bank with Fayyad away from the steering wheel," Ravid wrote.
While Israel was not connected to his departure, the government's "ambivalent" attitude towards him did not help, he said.
"The policy of (Israeli Prime Minister Benjamin) Netanyahu's government certainly didn't help Fayyad's survival on the job."