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After a turbulent year which saw a widening rift with the media and a falling out with elder brother Prince William, Harry said the couple hoped to become financially independent and set up a new charity, while continuing some royal duties.
"After many months of reflection and internal discussions, we have chosen to make a transition this year in starting to carve out a progressive new role within this institution," said Harry, sixth in line to the throne, and former actress Meghan in a statement.
"We now plan to balance our time between the United Kingdom and North America, continuing to honour our duty to the Queen, the Commonwealth and our patronages."
The couple said they would share full details of "this exciting next step" soon as they discussed the move with Queen Elizabeth II, Harry's father Prince Charles and William.
But the timing of the announcement appeared to have wrongfooted family members, including the queen, a senior royal source told Reuters.
"Other members of the family were not consulted on the content," the source added.
Buckingham Palace said discussions with Harry and Meghan were at an early stage.
"We understand their desire to take a different approach but these are complicated issues that will take time to work through," it said.
Harry (35) and Meghan, a 38-year-old divorcee whose mother is African-American and father is white, married in May 2018 in a lavish ceremony in Windsor Castle, and at the time it was heralded as a sign of a more modern monarchy.
Last year Meghan gave birth to their first child, Archie Harrison Mountbatten-Windsor, who did not receive a title.
But their relationship with the press turned sour as they struggled to deal with the intense scrutiny it put them under.
There have been negative stories about them, criticising their use of private jets while promoting environmental causes and the £2.4 million ($NZ4.7 million) taxpayer-funded renovation of their new home.
Eventually the couple, whose titles are the Duke and Duchess of Sussex, began legal action against some tabloid newspapers in October over phone-hacking and invasion of privacy.
Harry described the treatment of his wife as "bullying", and likened it to that of his mother Princess Diana before her death in a Paris car accident in 1997 when her limousine crashed as it sped away from chasing paparazzi.
The couple had suggested publicly they were struggling to cope with life in the spotlight, with Meghan telling an ITV documentary last year: "I've really tried to adopt this British sensibility of a stiff upper lip. I've tried, I've really tried.
"But I think that what that does internally is probably really damaging.
"I never thought that this would be easy, but I thought it would be fair, and that is the part that is really hard to reconcile," a tearful Meghan said as she described the difficulty of being a new mother and dealing with incessant scrutiny.
Harry also admitted in October last year to disagreements with his brother, Prince William, who is second in line to the throne.
"We are certainly on different paths at the moment, but I will always be there for him as I know he will always be there for me," Harry said at the time. "As brothers you have good days, you have bad days."
Harry and Meghan did not spell out what they were planning or where in North America they might live.
Last year it was reported that Harry would be executive producer of a documentary on mental health with US television mogul Oprah Winfrey for Apple's video streaming service.
They said splitting time between Britain and North America "would enable us to raise our son with an appreciation for the royal tradition into which he was born, while also providing our family with the space to focus on the next chapter."
Harry and William received more than £5 million from their father, Prince Charles, last year and it was not immediately clear how Harry and Meghan would achieve financial independence.
Royal biographer Penny Junor said it was possible Meghan, who starred in TV legal drama Suits, might revive her acting career given the demand and fees she could command.
"Perhaps she'd have to be careful about what roles she'd do because she is a member of the royal family," Junor said.
Last year was one of the hardest of the Queen's record-breaking 67-year reign, culminating in her second son Andrew stepping down from royal duties over his association with the late convicted sex offender Jeffrey Epstein.
Harry and Meghan earlier released this statement on Instagram detailing their decision and intentions:
"After many months of reflection and internal discussions, we have chosen to make a transition this year in starting to carve out a progressive new role within this institution.
"We intend to step back as 'senior' members of the Royal Family and work to become financially independent, while continuing to fully support Her Majesty The Queen.
"It is with your encouragement, particularly over the last few years, that we feel prepared to make this adjustment.
"We now plan to balance our time between the United Kingdom and North America, continuing to honour our duty to The Queen, the Commonwealth, and our patronages.
"This geographic balance will enable us to raise our son with an appreciation for the royal tradition into which he was born, while also providing our family with the space to focus on the next chapter, including the launch of our new charitable entity.
"We look forward to sharing the full details of this exciting next step in due course, as we continue to collaborate with Her Majesty The Queen, The Prince of Wales, The Duke of Cambridge and all relevant parties.
"Until then, please accept our deepest thanks for your continued support."