Tony Abbott will contest a Liberal leadership challenge from Malcolm Turnbull in a vote to be held tonight.
Mr Abbott arrived at 11pm before the doors closed with a group of about 20 supporters.
They included backbenchers Karen McNamara and Natasha Briggs as well as a number of cabinet ministers including Joe Hockey, Peter Dutton, Mathias Cormann and Eric Abetz.
"The prime ministership of this country is not a prize or a plaything to be demanded," Mr Abbott told reporters at Parliament House tonight, two hours after Mr Turnbull advised him of the challenge and his decision to quit cabinet.
Mr Abbott said he expects to win the ballot to be held in a special Liberal partyroom later on Monday night.
"I am dismayed by the destabilisation that's been taking place now for many, many months and I do say to my fellow Liberals that the destabilisation just has to stop," he said.
"I firmly believe that our party is better than this, that our government is better than this and, by God, that our country is so much better than this."
Mr Abbott said since coming to government, his team has stopped the boats, improved the budget, cut taxes and increased jobs.
"We have laid the foundation for a better deal for families and for small business," he said.
"You can trust me to deliver a stronger economy and a safer community."
WHY TONY ABBOTT SAYS HE SHOULD STAY AS PM:
• "We are not the Labor Party. This country needs strong and stable government and that means avoiding at all costs Labor's revolving door prime ministership."
• "Since coming to government, the coalition has stopped the boats, improved the budget, cut taxes and increased jobs, laid the foundation for a better deal for families and small business. You can trust me to deliver a stronger economy and a safer community."
• "The prime ministership is not a prize or a plaything to be demanded. It should be something which is earned by a vote of the Australian people."
• "I firmly believe that our party is better than this, that our government is better than this and, by God, that our country is so much better than this."
Mr Turnbull, a former opposition leader, appears to have the backing of deputy Liberal leader Julie Bishop who approached Mr Abbott before question time on Monday.
"A little while ago I met with the prime minister and advised him that I would be challenging him for the leadership of the Liberal Party," he told reporters at Parliament House on Tuesday.
"This is not a decision that anyone could take lightly."
Mr Turnbull said he made the decision after consulting with party colleagues and many Liberal supporters in every walk of life.
"It is clear enough that the government is not successful in providing the economic leadership that we need," he said.
Mr Turnbull said he regretted making the decision before the Canning by-election on Saturday.
"There are few occasions that are entirely ideal for tough calls and tough decisions like this," he said.
The alternative was to wait and allow the government's problems to "roll on and on and on" without clear air.
Mr Turnbull said it was clear the government had not been successful in providing the economic leadership that the nation needed.
"It is not the fault of individual ministers," he said.
"Ultimately, the prime minister has not been capable of providing the economic leadership ... he has not been capable of providing the economic confidence that business needs."
Mr Turnbull said there must be an end to policy on the run and captain's calls.
The government needed to be truly consultative with colleagues, MPs and the wider public.
"We need an open government that recognises that there is an enormous sum of wisdom both within our colleagues in this building and, of course, further afield."
Mr Turnbull noted the coalition had lost 30 Newspolls in a row.
"It is clear that the people have made up their mind about Mr Abbott's leadership."
There must be a style of leadership that respects the people's intelligence, explains complex issues and then sets out the course of action, he said.
"We need advocacy, not slogans," Mr Turnbull said.
He warned if Mr Abbott continues as prime minister, Labor would win the next election.
Mr Turnbull did not take questions, saying he needed to explain his decision to colleagues.
Nationals deputy leader Barnaby Joyce has warned Liberal MPs the coalition agreement will need to be renegotiated if Malcolm Turnbull wins a challenge against Mr Abbott.
There is no love lost between the junior coalition partner and Mr Turnbull, going back to his time as opposition leader.
"The one thing they need to realise is they will have to renegotiate the coalition agreement," Mr Joyce told AAP.
TEN TURBULENT MONTHS FOR TONY ABBOTT:
December 2014: Abbott reshuffles cabinet, dumping David Johnston as defence minister and shifting Peter Dutton from health to immigration. Scott Morrison gets the social services mega-portfolio. Abbott appoints a new media chief, the ABC's Mark Simkin.
January 2015: New health minister Sussan Ley dumps Medicare co-payment. Backbenchers are relieved. But Abbott then goes and makes Prince Philip a knight, without consulting colleagues, which is described as "ridiculous" and "stupid" by MPs. The LNP loses the Queensland election after one term and Abbott cops part of the blame.
February 2015: Abbott dumps his paid parental leave scheme and steps back from a role in selecting knights and dames, again to the relief of backbenchers. But MPs Warren Entsch and Dennis Jensen say the underlying concern about Abbott must be brought to a head. West Australian Liberals Don Randall and Luke Simpkins call for a spill but it is voted down 61-39 with no contender.
March 2015: NSW state election win gives Abbott some breathing space but highlights what can be achieved with a popular leader prepared to listen. Car industry funds and legal services spending which were due to be cut are retained at least in part.
April 2015: South Australian Liberals say unrest over Abbott is "clobbering" them. Government is kept on its toes with Andrew Chan and Myuran Sukumaran executions and terrorism arrests.
May 2015: Federal budget gets positive headlines for its small business tax breaks and families spending. Budget "emergency" talking point is binned.
June 2015: ABC is taken to task over Q&A allowing Zaky Mallah on the show. Abbott allows ASIO secret maps to be shown on TV when he visits the spy agency's headquarters. China free trade agreement is inked. Reports Australian officials paid people smugglers $US30,000 to turn a boat around.
July 2015: Abbott initially stands by Speaker Bronwyn Bishop over her chartering of a helicopter to attend a Liberal fundraiser. Bishop is cut loose as furore damages government.
August 2015: Furore over Dyson Heydon's acceptance of an invitation to speak at a Liberal fundraiser ends with Heydon rejecting a union bid for his dismissal. A joint Victorian police-Australian Border Force operation in Melbourne is cancelled after outrage over random visa checks.
September 2015: Minister Peter Dutton accuses Fairfax of a "jihad" against the government. Report of a hit list of ministers likely to be axed in reshuffle reignites leadership talk.
September 14: Abbott refuses to acknowledge mounting speculation his leadership is again under threat, dismisses it as "Canberra gossip, Canberra games" and insists his job is to submit himself to the judgment of the people after governing "effectively every day for three years".
- AAP