Prime Minister Malcolm Turnbull has defeated Peter Dutton 48-35 in a leadership ballot in the Liberal party room.
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The Home Affairs Minister has now resigned from the cabinet, leaving Mr Turnbull to consider a ministerial reshuffle.
The prime minister declared the leadership vacant after entering the party room with his deputy Julie Bishop shortly after 9am on Tuesday morning.
Party whip Nola Marino said Mr Turnbull won 48 votes to Mr Dutton's 35.
"He thanked his colleagues for their support," Ms Marino told reporters in Canberra.
Julie Bishop retained the deputy leadership after running unopposed.
Mr Turnbull called the spill after a week of leadership speculation sparked by Liberals angry with his National Energy Guarantee.
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The prime minister caved in to their demands to remove the emissions reduction target from the legislation, but it still wasn't enough.
After Mr Turnbull called the spill, Mr Dutton put his hand up to challenge.
Before the spill, Cabinet minister Christopher Pyne said Mr Dutton had told him the prime minister had his absolute support.
"I'm certain he is telling the truth," he told the Nine Network.
Less than two hours later Mr Dutton challenged the prime minister.
Mr Pyne described his Liberal colleagues stoking leadership tensions as "cowards".
"I think the public would react very negatively to another change of leadership without them having a vote."
A report in The Australian suggests Mr Turnbull had lost confidence of nine Liberal cabinet ministers - half of the Liberal contingent.
Mr Dutton's camp believed it could get to the 43 votes needed to oust Mr Turnbull, but the prime minister's backers insisted he still had majority partyroom support.
Fellow MPs from Mr Dutton's home state of Queensland are understood to have been encouraged to turn on Mr Turnbull.
Small Business Minister Craig Laundy warned a leadership change would go down like a lead balloon.
"If we are fighting amongst ourselves, guess what, when the voters go to the election, they'll mark us down as they should," Mr Laundy said.
Mr Turnbull told reporters earlier on Monday he had the confidence of Mr Dutton, the cabinet and the party room.
Adding to the prime minister's woes have been a string of poor poll results.
The coalition has lagged Labor in 38 successive Newspolls, eight more than Tony Abbott's record. However, Mr Turnbull has consistently rated higher than Bill Shorten as preferred prime minister.
Labor frontbencher Anthony Albanese said the prime minister should call an election, if he survives the week.
"I think that would be a good thing for the nation, because something has to change, this is chaos in the parliament at the moment," Mr Albanese told Sky News.
Australian Associated Press