Paul Oram, a former cabinet minister who served alongside Dunderdale, said he was informed Tuesday night of her decision.
"I think the premier has finally realized it has to be dealt with sooner rather than later," Oram said in an interview.
"There's no way to fix this."
Oram, who stepped down in 2009 citing health issues, now serves as president of the Tory party's district association in the riding of Terra Nova.
The premier's office declined comment.
"We are not commenting on any speculation tonight," spokeswoman Jennifer Tulk said in an email.
Dunderdale has been under increasing pressure after two defections from members who questioned her leadership.
Backbencher Paul Lane, who had been one of her most vocal defenders, left the Tory government on Monday to join the Liberals.
Lane said Dunderdale has lost touch with voters and badly handled major electricity failures earlier this month.
Lane's move followed one by Tom Osborne, who left the Tories to sit as an Independent a year ago before crossing the floor to join the Liberals.
One well-placed source within the Tory party said the premier had planned to hang on in power until at least the spring budget but Lane's departure during what was supposed to be down time with her family has sped her resignation.
Oram said Finance Minister Tom Marshall is expected to serve as interim premier until a new leader is selected.
Marshall has indicated he has no plans to run in the next provincial election, which was scheduled for October 2015.
Oram said he expects a leadership convention to be held in the spring with an election to follow a year later.
Dunderdale, 61, was first elected in October 2003 to represent the St. John's-area riding of Virginia Waters and took over as leader of the Progressive Conservatives after former premier Danny Williams quit politics in late 2010.
She was re-elected with a majority government in October 2011.
Oram said Dunderdale is personally well liked and did much good for the party, but she has been unable to stop a slide in approval ratings and a growing sense that she is not the right person for the job.
He said organizers have grumbled for months about Dunderdale's inability to connect with the public.
As much as Dunderdale's hastened departure will be a sad day, Oram said it's also seen by many in the party as a fresh start.
"We are definitely back in the game and are now ready to go out and win the next election."
With Dunderdale's resignation, the Tories would have 33 seats in the legislature. The Liberals have nine and the NDP have three. There are also two Independent members.
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