Schulz's deputy Olaf Scholz - the Hamburg mayor who is slated to become finance minister in the new government - said he would become caretaker SPD chairman, and the party confirmed that it had recommended parliamentary floor leader Andrea Nahles as Schulz's longer-term successor.
Nahles still needs to be formally nominated by the party executive, which is meeting on Tuesday evening.
Under the prevailing statues of the SPD, the party's parliamentary vice-presidents are designated to take charge in the vacant period between the departure of an old and inauguration of a new party leader.
Amid a swift leadership transition, Germany's Social Democrats (SPD) sank further into chaos on Tuesday after the party agreed to a coalition deal with Chancellor Angela Merkel's conservatives.
Schulz has been plagued with criticism from within the SPD, especially the youth branch of the party who have been vehemently against a coalition deal with Merkel.
With many SPD rank and file harboring misgivings about sharing power with Merkel again, the result of the vote, due on March 4, is wide open.
"I depart this office without bitterness or resentment", he said, nearly a year after he was elected as SPD party head with 100 percent of the vote.
Germany's stumbling efforts to install a new coalition government under the leadership of Angela Merkel remains on track despite a grassroots rebellion that led to the downfall of one of the country's most prominent politicians, analysts said Wednesday.
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Malu Dreyer, regional prime minister of Rhineland-Palatinate, said: "The SPD can not remain leaderless".
The new governance agreement, however, is yet to be voted on by party members.
In a cartoon published on Tuesday, the Sueddeutsche Zeitung daily showed Nahles with a whip riding an SPD snail.
The development followed Schulz's announcement Friday that he was abandoning plans to become foreign minister in the new government.
Germany has been without a formal government since the September 24 election and investors are anxious about a delay in policymaking, both at home and in the EU.
The departure is likely to soothe anger within the Social Democrats and make it more likely that the party's 460,000 rank-and-file members will vote to approve the coalition deal, analysts said. Juso leader Kevin Kuehnert has expressed concerns that the SPD would be electorally marginalized during another term as junior partner to the Christian Democratic Union (CDU) and Christian Social Union (CSU), calling for the renewal of German social democracy in opposition.
The SPD originally wanted to reinvent itself in opposition but reconsidered when Merkel's attempt to form an alliance with two smaller parties failed late past year.