He ended months of speculation by making the official public announcement at the Trimdon Labour club among the people who originally voted him into parliament.
After flying in by private jet from RAF Northolt Mr Blair was greeted with cheering reminiscent of his arrival as prime minister in 1997.
And in a powerful speech to mark the end of his Labour leadership, Mr Blair paid tribute to the "exceptional people" who had supported him during his time in power.
"I've come here where my political journey began and where it is fitting it should end," Mr Blair said.
"Today I announce my decision to stand down as Labour leader. The party will now select a new leader. On June 27th I shall tender my resignation from the office of prime minister to the Queen."
Earlier, as Mr Blair told senior ministers his plans, his expected successor, chancellor Gordon Brown, reportedly paid tribute to the outgoing Labour leader and his "unique achievement" during a decade in office.
And during the speech itself, Mr Blair looked back on his 13 years as party leader and ten years as prime minister, admitting that he had found it "difficult" to decide what to say.
He said ten years in charge was "long enough for me, but more especially for the country", acknowledging there were "judgments" to be made on his leadership.
But he pledged "hand on heart" that he had done what he felt was right for the country, alluding to the "bitterly controversial" decision to invade Iraq and Afghanistan as part of the fight against terrorism, which many commentators believe will be his lasting legacy.
"I may have been wrong," Mr Blair said. "That's your call. But believe one thing if nothing else; I did what I thought was right for the country.
"I came into office with high hopes for Britain's future and, do you know what, I leave with even higher hopes for Britain's future."
Concluding his stirring delivery, Mr Blair said he had been "very lucky and very blessed" to serve as prime minister.
"And this country is a blessed nation," he added. "This is the greatest nation on earth."
"It has been honour to serve it. I give my thanks to you the British people for the times that I've succeeded and my apologies to you for the times I've fallen short; but good luck."
Following the speech, a Downing Street spokesperson confirmed that Mr Blair "will remain as prime minister until the party finalises the election of his successor".
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