From Monday, Eric Ripper will occupy a seat on Labor's backbench for the first time in 20 years, before he retires from politics at the 2013 State election.
Mr Ripper said it had been an "honour and a duty" to lead the party and that he had taken on the job at a time when Labor was in danger of disintegrating in the wake of its humiliating 2008 election defeat.
He said his proudest achievements were the restoration of Labor's economic credibility when he served as treasurer under premiers Geoff Gallop and Alan Carpenter, and his achievements in native title after the "racist" agenda of the Court government.
He threw his backing behind Mr McGowan, saying the 44-year-old former minister "will bring drive and energy to the leadership".
Less than two weeks ago, Mr Ripper insisted he had the backing of his caucus colleagues and would lead Labor to the next election.
Asked what had changed, Mr Ripper said "new information" had become available, including persistent poor polling.
"If I knew the answer and could do something about it, I would have," he said.
"It is baffling. It is frustrating. I've done everything I can to communicate the Labor message. Sometimes in politics it just doesn't work."
Mr Ripper said he did not feel as though his colleagues had been treacherous, saying it was important that Labor MPs maintained their first loyalties to the cause of the party.
"Have a look at the history of leadership challenges," he said.
"It's always messy, it's always like this.
"This is politics and you have to take it as part of the nature of politics.
"The overriding loyalty that people have to have is to the party and the objectives of the party and, beyond that, to the people we represent."
Mr Ripper lauded his own record as treasurer, pointing to eight consecutive surplus budgets, $30 billion of new infrastructure, $900 million of retired debt and a competitive tax regime for business.
He said it was galling to hear Mr Barnett being regarded as a good economic manager when the Liberal Nationals Government had inherited $3 billion of debt and taken it to $16 billion.
Mr Ripper said he did not think there would be a role for him on Labor's frontbench and on Monday afternoon he decided to quit.
"I've still got an important job, I've still got an important role at least until March 9 next year and I am not going to let the people of Belmont down," he said.
"Part of me thinking about how hard to contest the leadership ballot was just whether I really wanted to stay on until 2017."
Mr Ripper paid tribute to his staff, his family and "the love of my life", his partner and Upper House Labor MP Ljiljanna Ravlich.