Loading

But O'Neill, who has been in power since 2011, has nominated former prime minister Julius Chan, 79, to replace him.

Analysts say the political turbulence could delay resource projects on the drawing board and major energy companies involved in PNG, including Total and ExxonMobil, are watching closely.

Political instability is not unusual in the poverty-stricken but resource-rich South Pacific archipelago. However, growing concern over resource benefits not reaching the poor has driven the latest attempts to topple O'Neill.

There is also doubt over the country's role in processing asylum seekers on behalf of Australia. Earlier this week, Foreign Minister Marise Payne said Australia would continue to have a good relationship with the key Pacific nation, but, asked about offshore processing she said: "We'll obviously deal with those issues as they arise".

"I think it's premature to speculate on those. As we've seen in recent weeks, Papua New Guinea politics is historically and clearly currently very dynamic. You'd be a very brave person to predict outcomes at the moment," Senator Payne said.

"It has been my great honour to serve this nation and lead this nation almost for eight years. Unfortunately politics in PNG plays out this way," O'Neill said.

"For the interests of the ongoing political stability and to ensure that we create confidence in the business community and the economy so that we can continue to have social unity in the country, it is important that I vacate this seat so that we can be able to move on," he said.

O'Neill was embraced by supporters and shook hands with opposition lawmakers after his address.

On Sunday he had promised to resign after a string of defections plunged his leadership into question and cost him his parliamentary majority.

"You have taken a decision that I think your country would be proud of," Pruiatch told the House. "I think you have responded and you have demonstrated leadership."

Parliament can replace O'Neill on its next sitting day once his resignation is accepted by Governor-General Bob Dadae.

Reuters, AAP