Former leader Michael Daley has withdrawn from Labor's leadership race.
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Mr Daley and rival Chris Minns were due to submit their nominations to a Labor caucus meeting today, but Mr Daley quit the contest.
Mr Daley said he had decided not to stand for the leadership "for the good of the party".
"Given it was completely clear Chris had majority caucus support ... it was wholeheartedly in the best interests of the party that I not put this to a ballot," he said.
"I just want to wish Chris well."
If Mr Minns is the only candidate, the party will avoid a costly and divisive caucus and rank-and-file ballot.
Sources told the Newcastle Herald on Thursday that Mr Daley could withdraw after some horse-trading with Mr Minns.
Another Labor figure said Mr Minns appeared to have a significant numbers advantage in caucus, meaning Mr Daley would have to win the lion's share of the rank-and-file ballot to prevail.
The leadership contest was sparked after former Newcastle MP Jodi McKay quit the post at the end of last week.
FROM EARLIER
Newcastle MP Tim Crakanthorp and Wallsend MP Sonia Hornery are the only two Hunter Labor representatives showing their hand in the party's looming leadership contest, publicly backing Chris Minns.
Mr Minns and former leader Michael Daley are expected to put their names forward when nominations open on Friday after Jodi McKay quit six days ago.
"If there is a ballot for the leadership of the NSW state parliamentary Labor Party, then I will be supporting Chris Minns," Ms Hornery said on Thursday.
"This is about restoring confidence in Labor.
"Chris has a positive attitude and is hardworking, and that is what the party and our NSW community desperately needs."
Mr Crakanthorp told the Newcastle Herald that he would also back Mr Minns.
"I have confidence in Chris taking NSW Labor forward," he said.
"I believe he has the fresh ideas and the fresh vision that our state needs."
Under party rules, the leadership contest will go to a ballot of rank-and-file members and the Labor caucus if both men nominate. That process could take more than two months.
One Labor source said Mr Daley could withdraw from the race after some horse-trading with Mr Minns.
Another Labor figure said Mr Minns appeared to have a significant numbers advantage in caucus, meaning Mr Daley would have to win the lion's share of the rank-and-file ballot to prevail.
The source said many in the party wanted to avoid a protracted, divisive and expensive leadership ballot which could detract from Labor's messaging in the lead-up to local government elections in September and the looming federal election.
"The rivals travel round the state kicking the s--- out of each other, then when it's over we have to act like we're unified," the source said.
Mr Daley beat Mr Minns in a leadership vote in November 2018, just before the 2019 election.
Ms McKay beat Mr Minns after Labor's 2019 election defeat, winning the caucus vote 29-21.
Port Stephens MP Kate Washington, Charlestown MP Jodie Harrison, Member for Cessnock Clayton Barr, Maitland's Jenny Aitchison and Swansea MP Yasmin Catley were all noncommittal on Thursday about who they would support in the event of a leadership ballot.
"Nominations are not yet open. Until I know for sure who the candidates are, determining a position would be premature," Ms Harrison said.
Ms Washington, the shadow environment minister, was contemplating a leadership tilt in 2019 had Ms McKay not run.
She was livid last week about Ms McKay's resignation, blaming "foul forces" and "treachery" in caucus for white-anting her friend and political ally.
Ms McKay said during her resignation speech that some in the party had "never accepted" her win over Mr Minns in 2019.
Mr Minns, the 41-year-old MP for Kogarah, quit the Labor frontbench on Wednesday last week after a staffer for Ms Catley, the former deputy leader, 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.
Shadow treasury spokesman Walt Secord, a Minns supporter, had quit shadow cabinet a day earlier.
Ms Catley also resigned as deputy leader and the Labor spokeswoman for rural and regional jobs and building.
Mr Daley, who is 55, came under fire five days before leading Labor unsuccessfully to the 2019 election for comments he made a year earlier about "Asians" with PhDs displacing "our young children" in Sydney.
Mr Minns has said this week that he has disagreed with the party's direction for the past two years.
"I believe the leader of the opposition's job is to explain to the people of NSW what we'd do differently, not just what the government's done wrong," he wrote on Facebook on Thursday morning.
Mr Daley says he is the only candidate for the job who can unify the party "so that we can get back to sticking up for the everyday people of NSW who rely on securing a Labor government".
Summer Hill MP Jo Haylen, a former staffer for Julia Gillard and Anthony Albanese, has been tipped as a possible deputy if Mr Minns emerges as leader.
More than a dozen Labor MPs have openly expressed their support for Mr Minns, but Mr Daley says he has the 15 MPs' signatures needed to nominate for the leadership when caucus meets on Friday. None of Mr Daley's supporters have backed him publicly.
Frontbencher Prue Car, the shadow education minister, told 2GB she had switched allegiances to Mr Minns after voting for Mr Daley in 2018.
"Michael has had his chance," Ms Car told the radio station on Thursday morning.
"We've been in opposition for 10 years and something has got to change ... and I believe Chris does represent that change," she said.
"I think Chris has got some real energy.
"He's got some positive ideas ... some positive policies so that Labor can be out there fighting for working families."
Health spokesman Ryan Park, local government spokesman Greg Warren, natural resources spokesman Paul Scully, and shadow finance minister Daniel Mookhey have also declared support for Mr Minns.
Backbenchers Walt Secord, Rose Jackson, Courtney Houssos, Guy Zangari and Hugh McDermott have also endorsed Mr Minns.
Upper house MP Penny Sharpe, Mr Daley's deputy during his four months in charge before the 2019 state election, is also in the Minns camp.
Internal party polling handed to the media by the Australian Workers Union in March showed the party's primary vote had fallen 8.4 percentage points to 23.9 per cent since 2019.
Labor won 25.6 per cent of the vote in its catastrophic 2011 loss under Kristina Keneally.