Wolfowitz, 63, said he was resigning in the "best interests" of the bank, thus ending a scandal over a generous pay and promotions package for his girlfriend, Shaha Riza.

 "I have concluded that it is in the best interests of those whom this institution serves for that mission to be carried forward under new leadership," Wolfowitz said in a statement after three days of deliberations by the World Bank board.

 Wolfowitz violated bank rules in arranging a generous promotion and pay package for Riza shortly after he assumed the bank presidency in June 2005, according to an internal World Bank report made public Monday.

 Riza ended up earning almost 200,000 dollars a year when she was transferred to the State Department while still on the Bank's payroll.

 The report also said the bank gave Wolfowitz vague instructions on how to resolve the possible conflict of interest over Riza.

 Wolfowitz said in his statement that he "acted ethically and in good faith" in what he believed "were the best interests of the institution, including protecting the rights of a valued staff member."

 The bank's 24 executive directors also issued a statement that seemed tailored to meet Wolfowitz's reported demand that the bank recognize their flawed advice in the Riza affair.

 The announcements drew a delicate face-saving balance, acknowledging that wrongs were done on both sides but that all parties had acted in good faith.

 The directors pointed to successes under Wolfowitz's two-year tenure, such as debt relief, clean energy investment and avian flu projects.

 "It is regrettable that these achievements have been overshadowed by recent events," they said.

 The resignation deal leaves Wolfowitz in office, but with greatly reduced powers, according to a source close to the negotiations, who said the outgoing president agreed to not make any major decisions on policy or personnel matters.

 Neither will Wolfowitz attend the Group of Eight finance ministers meeting this weekend in Potsdam, Germany, the source said.

 European countries had led the drive for his departure from the bank for more than a month.

 The White House said it regretted the decision of the former US deputy defence secretary -- a key architect of the Iraq war -- but that President George W. Bush would soon announce a new candidate to allow "an orderly transition."

 "We would have preferred that he stay at the bank, but the president reluctantly accepts his decision," the White House said in a statement.

 "The president will have a candidate to announce soon, allowing for an orderly transition that will have the World Bank refocused on its mission."

 By tradition, the United States nominates the World Bank chief while Europe names the head of its sister institution, the International Monetary Fund.

 IMF Managing Director Rodrigo de Rato said he respected Wolfowtiz's decision as taken "with the best interests of the bank in mind."

 "In the time we have worked together as the heads of the two Bretton Woods institutions, I have valued our partnership and admired Paul Wolfowitz's commitment to the cause of poverty reduction and to the bank as the world's leading development institution," Rato said in a statement.

 International development agency Oxfam called for the next World Bank leader to be chosen "in a properly accountable manner."

 "The US and other rich countries must now show that they are serious about good governance by allowing the next head of the bank to be appointed based on merit through an open accountable process," said Bernice Romero, advocacy director of Oxfam International.

 She called for an end to the US-European arrangement that "disempowers poor countries, the main clients of the Bank and the IMF."

 The list of his possible successors grew as the scandal deepened. In addition to former US trade representative Robert Zoellick, names often cited were Treasury deputy secretary Robert Kimmitt and former Federal Reserve chairman Paul Volcker.

 On Tuesday Wolfowitz had pleaded with directors to let him keep his job, in which he has made fighting corruption a priority.

 "I have said I am not without fault in the matter," Wolfowitz said of the scandal surrounding Riza.

Agence France Presse