"It hasn't been an easy decision, it's a decision I feel very comfortable with," Rae told reporters after breaking the news to his caucus behind closed doors Wednesday.
"For me, it was a question of deciding how I could do the best thing for the health of the Liberal party.''
Rae said he will stay on as interim boss and benign overseer of the coming leadership race.
He scoffed at the suggestion that at 63 -- a decade older than Prime Minister Stephen Harper -- he's too old for the job.
"My hair is white, but I still have a lot of fire.''
He also dismissed suggestions that he needs to spend more time with family, saying he's always managed to successfully balance public and private life.
Rae closed out the press conference with quotes from a Shakespeare sonnet. "The painful warrior famoused for fight / After a thousand victories once foiled, / Is from the book of honour razed quite, / And all the rest forgot for which he toiled: / Then happy I, that love and am beloved, / Where I may not remove nor be removed."
The Liberal party's national board of directors is holding a conference call Wednesday night to vote on timelines and rules for the coming leadership race.
The party had been expected to allow Rae to run for the top job, despite his previous assertions that he would not use his position as interim leader to campaign for the permanent position.
For the last year, Rae has almost single-handedly kept the Liberals from slipping into obscurity after getting reduced to a third-party rump in the last election.
When the NDP struggled under the sometimes shaky showings of their own interim leader, Nycole Turmel, Rae's virtuoso performance in the House of Commons arguably established him as the better foil to Prime Minister Stephen Harper.
All along Rae remained coy about whether he would run for permanent leadership if the party allowed it.
"I don't know," Rae told reporters in French when asked about it on Tuesday. "It depends on the decision."
Pundits will undoubtedly speculate about whether Rae's decision was motivated by a recent surge in popularity for Justin Trudeau.
The eldest son of former prime minister Pierre Trudeau has seen his numbers soar since beating burly Conservative Senator Patrick Brazeau in a charity boxing match. Some within the party think a second wave of Trudeaumania could revive the party's flagging fortunes.
Trudeau, who wants to devote time to his two young children, says he's not interested in the top job right now.
But with a recent poll giving him a two-to-one lead in popular support over the other presumed contenders and some Liberals urging him to run, the 40-year-old Montreal MP may rethink his decision to stay out of the fray.
Other names that have been floated for the coming leadership race include: Astronaut-turned-MP Marc Garneau, who is now the Liberal House leader, Ottawa MP David McGuinty, Vancouver MP Joyce Murray and New Brunswick MP Dominic LeBlanc.
Beyond them, a host of defeated MPs and failed Liberal candidates — including Gerard Kennedy, Martha Hall Findlay, Mark Holland, Borys Wrzesnewskyj, Martin Cauchon, Deborah Coyne and David Bertschi — are also thinking about running.
The Liberal leadership convention will be held in 2013, sometime between March 1 and June 30.
With files from The Canadian Press.