After days of swirling speculation, Mark Speakman announced his resignation.
Two challengers - Vaucluse MP Kellie Sloane and former minister Alister Henskens - are gunning for his position, with a leadership ballot set to be held.
Mr Speakman confirmed his resignation at a media conference on Thursday evening, having earlier cancelled a round of media interviews as speculation of a looming spill intensified.
One Liberal MP, speaking to AAP on the condition of anonymity, earlier said replacing Mr Speakman was a necessary move.
"We want to win government and it's not about the individual, it's about the team," the MP said.
"It's nothing personal against Mark, it's time ... the emperor is going to have to put on their new gear."
Mr Speakman had earlier on Thursday indicated he wasn't giving up.
"Reports of my death are grossly exaggerated and I'm here to fight," he told 2GB Radio, borrowing a Mark Twain phrase.
"I would expect anyone who wants to be the leader, who wants to knock me off ... would come and tell me and no one has."
The NSW Liberals have committed to net-zero greenhouse emissions by 2050, in contrast to their counterparts in Canberra.
Mr Speakman suggested infighting among his federal colleagues had inflicted further damage on the Liberal brand.
"We've taken a lot of brand damage from the turmoil in Canberra since then, and our job is to make sure we get clean air," he said.
The move against Mr Speakman comes after Victoria's Liberal opposition this week dumped Brad Battin as leader and installed first-term MP Jess Wilson.
Mr Speakman was animated in a tense question time in parliament on Thursday, while Premier Chris Minns appeared unfazed.
Outside parliament, independent MP Rod Roberts described the roiling leadership spectacle as a "Game of Thrones".
He cautioned the Liberals needed to move swiftly in order to become an effective opposition with a state election less than 18 months away.
The Liberal Party needs one-third of its sitting MPs to agree to a meeting in order to allow contenders to challenge for the position.
Ms Sloane, a former TV news anchor elected to parliament in 2023, has been widely tipped as the most credible challenger, while Mr Henskens has support from the right faction.
Mr Speakman confirmed reports three Liberals approached him for a conversation on Wednesday night, but maintained he had not been "tapped on the shoulder".
The NSW coalition has been in upheaval after the Nationals elected Coffs Harbour MP Gurmesh Singh as leader on Tuesday unopposed after Dugald Saunders' shock resignation for family reasons.
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