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Mr Craig confirmed his decision at the party's campaign launch at Rangitoto College in Auckland today.
For some months he has been weighing up his choice between Rodney, Upper Harbour or East Coast Bays.
His own polling shows he stands no chance of making it into Parliament without National gifting him the seat.
This afternoon Mr Craig said: "polling received this week showed my support is stronger in East Coast Bays than in Rodney".
"This result was an important part of my decision."
Mr McCully last week gave his strongest hint yet that he will oblige, telling journalists; "If you're asking me whether I'm going to consider stepping aside if I'm asked to -- look, I've always said that leaders and boards of parties do make strategic decisions."
But Mr Craig this afternoon said his campaign, launched under the theme of Standing for Something was "all about the party vote".
"Last time we achieved 1.7 per cent with a five week campaign. This time we have a full campaign period and the Conservative Party's goal is to exceed the five per cent threshold required to enter Parliament."
Mr Craig also announced Callum Blair would contest the Upper Harbour seat against National's Paula Bennett, and Mel Taylor would stand for the party in Northland.
He said the selection of Mr Blair did not mean party chief executive Christine Rankin would not be running for the party this year.
"There are decisions still to be made, and these will be advised in due course."
In his speech to a couple of hundred party faithful, Mr Craig strongly pushed his party's policy for the adoption of binding referendums.
He pointed to previous referendums where he said voters had spoken in favour of tougher sentences for violent crime, against the "anti-smacking" law, against asset sales and for a cut in the number of MPs.
However the will of the people was ignored, he said.
"'It didn't happen… none of those mattered."
Mr Craig said it was as if voters had bought "an airline ticket with the word democracy on it, but the cabin crew and pilots are taking us to a place we don't want to go".
He also underlined the party's other three key policy areas -- getting rid of "discounted sentences" so that convicted criminals served the full prison terms, getting rid of "special rights" based on race, and the introduction of a tax-free threshold so that all New Zealanders, rather than just the wealthy, got a tax cut.
- Adam Bennett of the NZ Herald