Resigning Act leader Rodney Hide has described a successful leadership coup by former National leader Dr Don Brash as "positive for Act and positive for the country".
Mr Hide, the Minister of Local Government, announced his resignation and endorsed Mr Brash to replace him at a media conference in Auckland just after midday.
The leadership change would strengthen Act and help it to establish its ideology more strongly in New Zealand politics, Mr Hide said.
He was "immensely proud of the Act Party" and would stay on in Parliament as a minister in the John Key led Government.
"It's nothing but positive for Act and positive for the country," Mr Hide said.
"You achieve as much as you can. There comes a time when someone needs to pick up the baton and take it forward."
Mr Hide said he had rung rival Dr Brash this morning to say he was resigning the party leadership.
Despite feeling his leadership might be coming to an end at the weekend, it had taken him several days to announce his resignation because he wanted to inform Prime Minister John Key first, he said.
He had asked fellow Act MP John Boscawen to organise a caucus meeting for Saturday to confirm Dr Brash as party leader.
"I believe that Don Brash is the best person to lead Act in this year's election," Mr Hide said.
"Don Brash has my full support to be the leader."
Dr Brash was at the announcement and, speaking after Mr Hide, said Mr Hide had "made a considerable contribution for New Zealand" and the country "owed him a debt of gratitude".
"Rodney and I have been friends for more than 15 years," said Dr Brash.
"In the last week or two I have put our friendship to considerable strain.
"He has made a considerable contribution to New Zealand."
Dr Brash said if Mr Hide had not won Epsom for Act then Labour would likely still be in power.
Dr Brash will become the party's leader outside of Parliament.
He would not comment on whether he would enter a coalition which included the Maori Party. He said he did not regard himself to be racist.
Meanwhile, Mr Hide said he was planning on staying with the Act Party.
He had not canvassed his colleagues and did not know who had changed their vote.
He would not comment on his future in Epsom, although he said it was up to the party whether he stands in the electorate in the election.
However, Dr Brash signalled he wanted Mr Hide to leave Parliament.
"That's certainly been the normal pattern when a political party leader loses his position," he told Newstalk ZB.
"Jim Bolger, for argument's sake, left Parliament when he lost the leadership of the National Party, Jenny Shipley similarly. It's not an uncommon pattern."
Brash-led party 'devastating'
Labour leader Phil Goff warned Dr Brash's leadership of Act would result in "a new extreme right-wing deal" between Act and National which would have "a devastating impact on the lives of middle and low-income New Zealanders".
"We know what Don Brash stands for. He wants to slash the minimum wage by $100 a week - putting more New Zealanders into poverty."
Superannuation would also be on his hit list.
"Don Brash wants savage cuts to Government spending, including health and education. Working for Families and interest-free student loans would be gone and there would be a wholesale sell-off of our valuable community-owned state assets.
"This is what Kiwis could expect under a Government led by John Key and Don Brash."
Given the close links between Dr Brash and the National Party, "there are grounds for suspicion that today's outcome is the result of collaboration between the two parties".
Dr Brash's leadership of Act "will allow National to pursue all the policies it has wanted to pursue but has been afraid to admit to so far".
"These are not the kinds of policies mainstream New Zealanders support."
Meanwhile, United Future leader Peter Dunne said Mr Brash's "hostile takeover" of Act would "horrify" most New Zealanders.
"Today the reality of what will be at stake in the November 26 election has been spelt out clearly for all New Zealanders and it should scare them," he said.
Mr Dunne said with Labour "in meltdown" National would lead the next Government and the only question remaining was: "Which party do New Zealanders want to influence that government?"
As a "rigid right wing ideologue" Mr Brash's leadership of Act would drive National to the far right.
"Give him influence and a hand on power and watch the New Zealand we know become a harsher, more brutal place," Mr Dunne said.
On the other hand, he said the Maori Party would push the Government toward activism and race-based laws.
United Future, said Mr Dunne, intended "keeping National anchored in the centre".
Green Party co-leader Metiria Turei accused Dr Brash of taking over Act like it was a "piece of plastic on a monopoly board."
She urged him to be open and honest about who was funding his political operations.
"Dr Brash has after all just bought a political party as if it were a piece of plastic on a monopoly board.
"The public deserve to know who the banker for this operation is."
Ms Turei feared he would promote the same controversial race relations policies as he did as National Party leader in the 2005 election.
"Don Brash as National Party leader in 2005 helped divide New Zealand with his Iwi/Kiwi Billboards.
"John Key needs to stand up and reject Dr Brash's divisive policies on race relations, something he failed to do when Dr Brash was his leader."