Sanader only said he had made the decision after deep consideration, and recalled that he had been in politics 20 years, and at the helm of the HDZ for 10 years.
He said he would not run for president of the republic later this year, and dismissed speculation that he is ill. "Thank God, I'm not ill," he said.
He had informed President Stjepan Mesic of his decision on the phone and they are to meet for talks later in the evening.
Sanader stressed that he had notified the presidents of the ruling coalition parties about his decision, that they accepted it, and that the coalition would survive in parliament.
"We already have 83 signatures of support from our coalition partners, which are the majority as it is," he said, adding the coalition would nominate Deputy PM Jadranka Kosor as the new prime minister.
Kosor is likely to succeed Sanader also as president of the HDZ.
Sanader said Darko Milinovic would be the new HDZ Deputy President.
Asked by the press if he was ruling out any possibility of becoming active in politics in the future, Sanader said he could not rule this out, and dismissed allegations that he was stepping down because of the difficult situation Croatia is in.
Responding to repeated questions from the press to explain in more detail reasons for his withdrawal Sanader said he had done his part of the job.
"In life there are moments for a fresh start and I have come to the conclusion that this is one of those moments. I did my share, and now it is time for others," Sanader said.
He said he was not leaving because of his condition or because he planned to resume his career in some EU institution.
"I am leaving satisfied as all strategic goals have been achieved. Croatia has become a true factor of the international politics, we are a member of the Security Council, NATO and we are on the threshold of the European Union, only a political decision needs to be made and we can finish negotiations in three months' time, he said.
Asked by reporters whether his decision could be linked with inefficiency in Croatia's EU accession negotiations, Sanader answered that he could not say that there was no connection.
I certainly had that on my mind when thinking about the resignation. Certainly, the EU and the project of the European integration, which I have repeatedly stated over recent months, stand no chance if the principle of blackmailing is accepted as a principle for negotiating, Sanader said.
Stating that he could not rule out his reinvolvement in politics, the outgoing PM, however, refuted allegations he was withdrawing because Croatia was in a difficult economic situation. In this context he stressed that he never shunned responsibility and added that he always perceived engagement in politics as serving to people and Croatian citizens in achieving strategic goals.