He says he will stand down at an extraordinary congress of his ruling AK Party later this month.
Analysts fear it could herald a further shift towards authoritarianism for the country.
There were rumours they'd fallen out, with an ongoing tussle for power between the Prime Minister and President going on behind the scenes
But not any more.
Prime Minister Ahmet Davotoglu has called an emergency party congress, effectively announcing he's stepping down.
"I am not considering running as a candidate under the current circumstances. The congress should be held in unity and solidarity. There should not be any arguments because the faith of the AK Party is now the faith of Turkey and the faith of the new world. "
Analysts say Ahmet Davutoglu's resignation paves the way for President Recep Tayyip Erdogan to pursue a tighter grip on power.
He was hand-picked by President Erdogan, with many believing that's because he wasn't seen as a threat.
However, after his criticism of the President's attempts to broaden his constitutional powers, and public disagreements on policies including European relations and the treatment of government critics, he's now fallen out of favour.
The tension perhaps implicit - in his choice of words today.
"This era was the era of a strong president and a strong prime minister, as our president said in his speech in the last emergency convention. I tried to put this principle, stressed by our president that day, into practice. That day, our president had said 'I don't want a caretaker prime minister'. That was the right approach. That was the correct advice. I took over the (prime ministry) and worked day and night to be true to the position. Our nation is the witness."
However, he gave a nod to party unity.
"I will maintain my relations of loyalty to our president until my last breath. No one has ever heard any word from me against our president and never will... I would like this to be known clearly, and I wouldn't let this issue be exploited. The honour of our president - as both being the president of Turkish Republic and my comrade - is my honour, his family's honour is my honour. His family is my family."
Mr Davutoglu's announcement sparked turmoil in the markets - as investors got jittery about the future of economic reforms and the political climate
White House spokesperson Josh Earnest chose his words carefully.
"There's no denying that Turkey has been an important partner and made a valuable contribution to our broader counter-ISIL effort. But as we often do we regularly remind Turkish with orders authorities to ensure that their actions uphold the universal democratic values that are enshrined Turkey's constitution.
EU Foreign Policy Chief Federica Mogherini says developments in Turkey are being monitored closely.
"Obviously we are following since actually yesterday evening the developments in Ankara and obviously it's a bit too early to define if that will have implications and in the case of what kind? We will obviously discuss this first of all with the Turkish authorities and define together how to move forward."
Fahrettin Ari, the editor of Australian Turkish "Dunya" says things have changed since Erdogan became President in 2014
He says to survive in Turkey - especially as a journalist - you have to appear to be an Erdogan supporter
"He wants to control everything - everything - simple as that. Whatever you say against him - you go to jail. Doesn't matter, you're media, you're normal person, whatever you are."
The emergency convention to select a new party leader is scheduled for May 22.
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