Former leader Michael Daley and Kogarah MP Chris Minns are poised to contest the leadership after Ms McKay held an emotional media conference at Parliament House to announce she was stepping down.

"I want to apologise to those who wished I had stayed, but this is the only way I know that I can unite our party," Ms McKay said.

"I have spent the last six days reflecting on how to achieve unity."

She said some in the party had "never accepted" the outcome of the 2019 ballot that elevated her to the leadership above Mr Minns.

"There has to be a future where there is no destabilising of the party's leader from within," she said.

Ms Washington, the shadow environment minister and a caucus ally of the former Newcastle MP, pointed the finger at a "self-indulgent division" in caucus for her friend's departure.

"I have seen that Jodi's leadership was never about the personal pursuit of power; it was always about doing the right thing by the people of NSW and the Labor Party," she said in a media statement.

"As a Hunter MP, I recall when Jodi first faced down foul forces within our own party.

"I've long admired Jodi's integrity, strength and resilience in the face of treachery. Today is no different.

"I join with Jodi in hoping the self-indulgent division within the Labor caucus will end."

Former Labor powerbroker Joe Tripodi admitted at an ICAC inquiry in 2014 that he had been part of a smear campaign designed to discredit Ms McKay, then the sitting Newcastle MP, before the 2011 election because she opposed a planned new coal loader at Mayfield.

Ms McKay, a former NBN television newsreader who grew up in Gloucester, left Newcastle for Sydney after that election and won the seat of Strathfield in 2015.

She quit the leadership just two days after vowing to stay on following Labor's dismal showing in the Upper Hunter by-election.

Her supporters in caucus, including Ms Washington, had spent Friday morning trying to convince her to change her mind.

Mr Minns, Ms McKay's main leadership rival, quit the Labor frontbench on Wednesday after a staffer for deputy leader and Swansea MP Yasmin Catley distributed a dirt file on him to the media.

The staffer was sacked the same afternoon, and both Ms McKay and Ms Catley denied knowing about the dossier.

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Shadow treasury spokesman Walt Secord, a Minns supporter, quit shadow cabinet on Tuesday.

Ms McKay said earlier in the week that Mr Minns "just doesn't have" the numbers to challenge her.

She said on Friday that she still would have had the numbers to win a leadership ballot and no one had asked her to quit.

"If a ballot were held today, I can tell you I would win it," she said.

Ms Catley also resigned as deputy leader and the Labor spokeswoman for rural and regional jobs and building.

Mr Minns, who has lost two Labor leadership ballots, including against Mr Daley in November 2018, is now likely to put his name forward to front the party.

He said on Friday afternoon that he would continue talking to party colleagues about how to "win the confidence" of voters.

One Labor source said the dirt file and the by-election defeat had provided the Minns camp with a "springboard" to agitate for change.

The dirt file included the result of the 2019 leadership ballot between Ms McKay and Mr Minns and mentioned a well publicised 2019 ICAC investigation into political donations to Mr Minns.

The party's caucus and rank-and-file will vote on the leadership if it is contested by both Mr Daley and Mr Minns. The result will not be known for several weeks.

Both men face hurdles in convincing their colleagues and party members they are right for the job.

Mr Minns faces questions about his role in undermining Ms McKay.

Mr Daley came under fire five days before leading Labor unsuccessfully to the 2019 election for comments he made a year earlier about "Asians" displacing "our young children" in Sydney.

Cessnock MP Clayton Barr said he was "really disappointed" Ms McKay had stood down, saying she had brought a compassionate tone to the opposition and was a strong advocate for the Hunter.

"She has brought to the leadership a lot of empathy, heart and warmth, which I think is absolutely crucial to our Labor movement," he said.

"In Jodi we had a leader who is of us and from us. It's been a long time since the Hunter had the opportunity to have the leader of our party be one of us.

"I admire her reason for going and her nobility for going, which is to find unity in the party, albeit I'm incredibly disappointed it's come to this."

Wallsend MP Sonia Hornery thanked Ms McKay for her two years of service during a difficult period dominated by the COVID pandemic and bushfires.

Newcastle MP Tim Crakanthorp said Ms McKay had made a "tough decision" to stand down "but it speaks to her integrity and her commitment to putting the best interests of the opposition and our state ahead of her own".

NSW Farmers president James Jackson said Ms McKay had taken a "genuine interest" in the state's agricultural issues and increased NSW Labor's connection with the bush.

Maitland MP Jenny Aitchison hailed Ms McKay as the first NSW Labor leader to be elected at a ballot of party members and caucus.

"Jodi was also the first NSW Labor leader in a generation to grow up in a country town and ensured that Labor would be a party for regional and rural NSW," she said.

"Jodi called on her shadow cabinet to get out of Macquarie Street and listen to people in our regions, not just talk at them.

"The statement from the NSW Farmers is indicative of the respect Jodi commanded from those who are not traditional Labor voters."

Ms McKay fronted the media the day after the by-election defeat last weekend and said she was "devastated" that Labor's message had not cut through with voters.

Labor won only 21.2 per cent of the primary vote in Upper Hunter, down more than seven percentage points since the 2019 general election, as the Nationals achieved a 3 per cent swing after preferences.

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