Milbradt resigned his functions both as Saxony state premier and chairman of the Saxon Christian Democratic Union (CDU). He had been under fire within his for months, ever since the virtual collapse of Saxony's state bank.

"I have decided to hand over my official functions, because an orderly and harmonious transition is especially important to me -- and to prevent injuries -- to me and others," the 63-year-old said on Monday in Dresden.

"Now is the right time," he added, indicating he would step down at the end of May.

State elections are scheduled for 16 months from now.

The bank, Sachsen LB, had accumulated massive liabilities from speculating in so-called structured-finance products linked to US home mortgages. It had to be sold to another bank to save it and the bank's entire management board lost their jobs.

The state remains liable for most of Sachsen LB's losses, which could amount to 1.2 billion euros ($1.9 billion), according to Siegfried Jaschinski, chief of the bank's new owner, LBBW.

Personal issues

Milbradt, who has been premier since 2002, tried to put a positive spin on his handling of the bank crisis on Monday, saying he had prevented further damage to the state.

"Today it would no longer have been possible to save the jobs in Leipzig and merge the bank with the LBBW," he said.

Milbradt also faced heavy criticism over private investments he and his wife carried out through Sachsen LB. Critics dubbed them dubious, though the state government said they were legal. The Social Democrats, the CDU's coalition partner in the state, have demanded an explanation from Milbradt, who has consistently rejected making a statement.

The outgoing premier proposed 49-year-old Stanislaw Tillich, currently Saxony's finance minister as his successor as premier and the head of Saxony's CDU, calling him a "strong and experienced politician."

The free-market liberal FDP and the Left party have both called for new state elections in the wake of Milbradt's resignation.