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He announced his resignation after seven years at a press conference in Port Moresby on Sunday, and has handed over the leadership to Sir Julius Chan, the ABC reported.
The news follows weeks of turmoil in his People's National Congress Party, with several ministers in the coalition quitting.
O'Neill's authority was expected to be tested in parliament on Tuesday, with the opposition thought to have enough votes to control the floor of parliament to mount a vote of no confidence.
Much of the concern about O'Neill's government has reportedly been unease over a recent natural gas development deal with France's Total and its partners.
Finance Minister James Marape defected in April in the wake of the gas deal, while other government MPs followed him out the door over recent weeks - including nine on Friday.
O'Neill, who had been resisting calls to quit, at the beginning of May adjourned parliament for three weeks. It was due to sit again on Tuesday.
The ABC reported then that Opposition Leader Patrick Pruaitch said the opposition had submitted a notice of its vote of no confidence and was committed to ousting O'Neill when parliament returned on May 28.
O'Neill's resignation will be formalised when he visits the Governor-General.