The announcement is in response to an appeal for the leader of the Australian Labor Party to end the deadlock over the top position amid a push by supporters of former Prime Minister Kevin Rudd for his return. The call was made by Simon Crean, a Labor elder.
"This is not personal. It's about the party, the future of the country," Reuters quoted Mr Crean.
While the move may spell the end of Ms Gillard's days as prime minister, which is up anyway with the September 2013 federal election, reports said that she took the challenge because of confidence of support from major party members such as Bill Shorten and Stephen Conroy.
Before the announcement by Ms Gillard, Opposition leader Tony Abbott failed in his attempt to have a no confidence vote in the government. Mr Abbott insisted that Australia was led down by a bad government.
After her announcement, Ms Gillard told Mr Abbott, "Meanwhile, take your best short."
The supporters of Mr Rudd insisted that the former prime minister needs to reassume ALP leadership for Labor to retain power in the September election.