Jon Lansman announced on Sunday he is withdrawing from the battle to be named as the party’s new general secretary.
He claimed he has “fulfilled” his aims of opening up the contest and prompting a debate about the future of the party.
Posting a statement on Twitter, Mr Lansman said: “When I declared my interest in becoming Labour’s general secretary my aims were to open up the contest, instigate a debate about how the Labour Party can develop and encourage those of our 570,000 members who believe they have the skills and experience to apply.”
Mr Lansman’s candidacy for the role of Labour’s most senior party official had threatened a divisive battle between the party’s internal factions.
He had pitched himself and his Momentum group, who want more of a say for party members, against Labour’s traditional trade union supporters.
Mr Lansman’s main rival for the post, senior Unite employee Jennie Formby, will now be the heavy favourite to be elected general secretary by the party’s ruling National Executive Committee (NEC) on 20 March.
Ms Formby would be only the second-ever female general secretary in Labour’s history and is seen as the pick of party leader Jeremy Corbyn’s allies.
Shadow chancellor John McDonnell has already offered his public backing to Ms Formby.
Mr Lansman reportedly applied for the powerful general secretary role against the wishes of Mr Corbyn, despite Momentum having formed out of the Labour leader’s first leadership campaign in 2015.
He announced his candidacy earlier this month and declared he wanted to encourage more women to apply for the role.
Explaining why he is now withdrawing from the contest, Mr Lansman said: “NEC members have begun a productive, comradely debate about the future of the party.
“Whether the general secretary should be elected and what a transformed, member-led Labour Party could look like are big, urgent questions – and I’m heartened to see members across the country openly debating them.
“I’ve also had a number of party members get in touch to let me know they are applying for the role of general secretary.”
Mr Lansman, who is among those to sit on Labour’s ruling body, added: “With my aims fulfilled, I have decided to step back from the race to focus in my role on the NEC, working with members and affiliates to replace the old top-down model with modern, open and transparent, pluralist, participative democracy.
“We need to restore the elected NEC to its proper governance role including holding our new general secretary to account and upholding the rights of party members.
“I am looking forward to seeing a good range of applications for general secretary and whoever is chosen, I shall of course give her (or him) my full support to build a strong united party and win the next election.”
In a further tweet, Mr Lansman said he “always knew” he was “likely to lose to a woman”.
The contest for general secretary follows the resignation last month of Iain McNicol, which was accompanied by reports he was forced out by Mr Corbyn’s allies.
His departure was viewed as the Labour leader’s allies further tightening their grip on Labour’s internal machinery.
Labour’s general secretary has responsibility for recruiting party staff, overseeing campaigns, organising annual conferences, and guarding the party’s legal and constitutional structures.