In a shock announcement which caught the Coalition government off guard, Mr Baillieu said he had advised Premier Denis Napthine he would not be recontesting his seat.

Mr Baillieu has previously pledged to stay on, resisting pressure from some quarters that he vacate his plum electorate to make way for fresh talent.

On Friday Mr Baillieu, who stood down as premier in March 2013 after facing pressure from within his own party, was giving little away.

"On reflection, now is the right time to step aside and provide an opportunity, in time for the Party to select, a fresh face to join the Liberal team," he said in a statement.

"I do so knowing the Coalition Government has an exceptional record of achievement and a powerful agenda to build a better Victoria."

His successor, Premier Denis Napthine, issued a statement just before 2pm thanking Mr Baillieu for his "extraordinary contribution".

"I am proud to say that Ted Baillieu is also a close friend, whose advice over the years, I have valued and appreciated."

Mr Baillieu brought the budget back to a "sustainable footing" and introduced many successful policies, Dr Napthine said.

"Without Ted's tireless efforts and contribution as both Leader of the Opposition and Premier of Victoria, this great state would not be in the strong position that it is in today."

The announcement set off a flurry of speculation about who might replace him in Hawthorn, which the  Liberal Party holds by a margin of 16.6 per cent.

John Pesutto, who has a long history in the party and currently serves a Premier Denis Napthine's legal counsel,  is understood to be "very interested" and is regarded by many as a strong candidate.

Other sources said Community Services Minister Mary Wooldridge - who Mr Baillieu has strongly backed- was another strong possibility.

They said Mr Baillieu had decided to wait until now to make his resignation announcement because it meant the administrative committee would select the candidate, bypassing the local vote.

"We think Ted is trying to get Mary Wooldridge into the seat."

Ms Wooldridge lost preselection for the seat of Kew in March to former Stonnington mayor Tim Smith, but has since been preselected for an upper house seat.

Senior Liberal sources were also speculating that Health Minister David Davis, a close ally of Mr Baillieu's, could be preparing to descend to the lower house to replace the former premier in Hawthorne. Mr Davis, seen as a strong performer, currently represents the upper house South Metropolitan region.

Mr Davis, who paid tribute to Mr Baillieu as a friend and colleague, is not ruling out a move to the lower house.

"I don't think today is a day for that, today is a day for discussion about Ted Baillieu's legacy, about his contribution and I'm determined to honour that contribution, to make the point very clearly that he was has contributed massively for Victoria," Mr Davis.

Institute of Public Affairs director John Roskam is believed to the mix of potential candidates.

Public relations consultant Jason Aldworth was touted as a possibility but has ruled out standing for the seat.

Mr Baillieu entered politics in 1999 as the member for Hawthorn.

The former architect held a number of shadow ministries including Tertiary Education and Training, Gaming, Planning and the Arts. More recently he has been chair of the Victorian Government's ANZAC Centenary Committee.

He was elected Leader of the Victorian Liberal Party in 2006.

A spokeswoman from Mr Baillieu's office said he would not be addressing media. It is understood that Mr Baillieu is working in his office today.

The former premier's private conversation was at the centre of the dictaphone scandal that has recently enveloped Victorian politics. In the conversation, which was between Mr Baillieu and a Fairfax journalist, he criticised his Liberal colleagues.

Federal Opposition Leader Bill Shorten said rising to become Premier of Victoria was a remarkable accomplishment for Mr Baillieu accorded to very few people.

"I think the Liberal Party are probably wondering if they did the right thing in terms of replacing him but today I say to Ted Baillieu congratulations on your service and now your family get you to come back to them."