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Michael Ignatieff's Liberal leadership ambitions were realized Tuesday when Bob Rae, his only remaining rival, gracefully backed out of the race.

Ignatieff, a former Harvard professor who switched to politics in 2005, saluted his old friend Rae for a long career in public life and also pledged to rebuild the Liberal party

"Bob Rae has dedicated his life to serving Canadians and I have always felt privileged to count him as a friend and colleague," said Ignatieff in a statement.

"I am grateful for his support and I look forward to continuing the work of rebuilding the Liberal party with him, and all Liberals, in the weeks and months ahead."

Ignatieff will now be tasked with uniting a fractured and cash-strapped party that sunk to historic lows under the leadership of Stephane Dion and was badly beaten in the October election.

The party also must be ready for a potential parliamentary showdown in the House of Commons, when the Tories introduce their budget on Jan. 27.

Rae's announcement, which marked a sudden reversal, means the Liberal party can avoid a long and potentially divisive leadership contest.

"I am not a candidate for the interim leadership, nor shall I pursue my candidacy for the party leadership at the Vancouver convention," Rae told reporters at an afternoon press conference.

Just 24 hours earlier, Rae said he wanted a democratic leadership process that involved grassroots liberals, not a coronation.

But on Tuesday, Rae said the circumstances on Parliament Hill required a different approach.

"I hope Liberals will understand what is happening," he said. "It's an unusual time. Nobody anticipated a fundamentally stupid economic statement."

The Liberals, NDP and Bloc Quebecois dismissed the Conservative government's fiscal update, saying it offered little help for Canada's economy and was designed to financially cripple their parties by slashing public funding.

Rae called the fiscal update "misleading, hopelessly partisan, and completely inadequate to the economic challenges of our time." He also said his decision to withdraw his leadership bid was influenced by:

• Prime Minister Stephen Harper's decision to suspend Parliament to avoid a vote of confidence and the approval of that decision by the Governor General.
• Liberal Leader Stephane Dion's announcement Monday that he would resign as soon as his successor was picked.
• The decision by the Liberal national executive to establish a consultation with selected groups before appointing an interim leader of the party.

"In these circumstances I believe that the Liberal Party of Canada requires a new leader to be in place before Parliament returns at the end of January," Rae said.

The Liberals want to have a new leader in place before the end of the year, so they can prepare for a possible showdown with the Tories in Parliament early next year.

If the Liberal-NDP coalition votes down the Tory budget, which will be tabled on Jan. 27, the Tories would be toppled and Canadians could get a new government or another election.

With Rae out of the race, Ignatieff is expected to be named interim leader next week. He will then be officially confirmed as Liberal leader at the party's convention next May.

"I offer him (Ignatieff) my full and my unqualified support," Rae said. "He has been a friend of mine and a colleague for more than 40 years. I call on my friends and my supporters to do exactly as I am doing today."

Rae had wanted all Liberal members to vote on the leadership. But the party's national executive decided they would have a vote that only included MPs, senators, riding association presidents, club presidents, and defeated candidates. They also decided it would be on Dec. 17 - not enough time for Rae to organize a significant challenge to Ignatieff, who already had the support of support.

"I learned how to count a while ago," Rae joked on CTV's Mike Duffy Live. "I drew a conclusion that said it was time to pack it in."

CTV's Ottawa Bureau Chief Robert Fife first reported earlier Tuesday that Rae had told a close group of his supporters in a morning conference call that he was ending his bid for the Liberal leadership.

Liberal Sen. C�line Hervieux-Payette, who participated in the conference call, was reportedly furious over the process by which Ignatieff will take power, Fife said.

"This will destroy the Liberal Party, I'm devastated by what this will do to the party, they don't understand anything about democracy," she said, according to notes obtained by Fife.

Rae told his supporters he would handle the decision with dignity, and would fully back his old friend, Ignatieff -- someone he has known for more than four decades.

"He happens to be somebody I grew up with and i know very well, so I have a lot of confidence in Michael," Rae told Mike Duffy Live.

He also dismissed the idea that he would be bitter and angry about losing his chance to lead the party.

"The leadership is done. That's an ambition I had and I've set aside. You just have to learn how to do that," he said.

Then he added: "It happens in life. And I think I have a lot of support in the party, and friends and supporters in the country, and I'm going to continue to be active in public life."