Mr Schulz on Friday abandoned his plan to become Germany's next foreign minister after the SPD's youth wing accused him of securing a favourable position for himself.
The leader of Germany's Social Democrats (SPD), Martin Schulz, has abandoned a plan to serve as foreign minister in a new coalition government.
The resignation of Schulz is a major blow to the stability of the already fragile grand coalition for Chancellor Angela Merkel, who failed to form a coalition government with the libertarian Free Democrats and the Green Party back in November.
Last Monday, the SPD reached an agreement with German Chancellor Angela Merkel's Conservatives Union to form a grand cabinet in formal government coalition negotiations, a move likely to end the longest ever new government vacuum after the September 24 federal elections.
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Andrea Nahles, a plain-speaking 47-year-old former labor minister with a left-wing slant and strong oratory skills, will become Schulz's successor.
The upheaval at the top of the SPD has distracted from party leaders' attempts to convince party members to agree to the coalition deal.
Leader of the SPD group in Thurianga, Matthias Hey, said: "Our mood regarding what is happening in Berlin now is down in the cellar". They say it is against party rules and one of the current deputies should step in until members can vote on a new leader. The party's 464,000 party members will vote in a postal ballot on the deal, with the results expected to be announced on March 2.
"If I can contribute to that by resigning, it will have been worth it", he said outside the SPD headquarters.
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According to a source from the SPD, leader of the Social Democrats until April 22 will be the mayor of Hamburg Olaf Scholz.
Nahles said she would start campaigning at the weekend for members to vote "yes" to a coalition with Merkel, who has led the European Union's most populous country and economic powerhouse since 2005.
In a cartoon published on Tuesday, the Sueddeutsche Zeitung daily showed Nahles with a whip riding an SPD snail.
The SPD and CDU both had their worst results for decades in the election, which catapulted the far-right Alternative for Germany (AfD) into parliament for the first time, with 94 seats.
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But Oettinger also conceded that this would be her final term as chancellor, if the new "grand coalition" goes ahead, addressing a succession debate that is starting to take hold as the CDU starts to look ahead to a post-Merkel era.