Gadkari, who till Tuesday afternoon appeared certain to be re-nominated, issued a statement late in the evening saying he would not be seeking another term as president.
The development followed Tuesday's Income Tax 'surveys' of around nine locations connected to alleged financial wrongdoing by company linked to Gadkari and signals by party MP Yashwant Sinha that he could contest if Gadkari was re-nominated.
Informed sources said BJP veteran L.K. Advani also had reservations of Gadkari getting a second term in view of allegations surrounding the Purti group linked to him.
They said that Rajnath Singh was likely to be once again made party chief though efforts were being made to find "a more nationally accepted face". Singh has been BJP president twice earlier.
The BJP president has traditionally been elected unopposed.
Rajnath's Singh's name emerged after a series of meetings involving party leaders Arun Jaitley, Venkaiah Naidu, Ram Lal and Ananth Kumar.
There was unease in sections of BJP over Gadkari's continuance though the party gave him a clean chit following a probe done by S. Gurumurthy, a financial analyst considered close to Rashtriya Swayamsevak Sangh (RSS).
BJP leaders feared that his second term would come in the way of party's all-out attack against the United Progressive Alliance (UPA) government on the issue of corruption in the run up to series of assembly polls this year and Lok Sabha polls in 2014.
Sources said RSS had been in favour of giving a second term to Gadkari despite apparent lack of warmth to the move by Advani. They said that Gadkari not getting a second term was an affirmation of Advani's writ running in the BJP and also vis-a-vis RSS.
In his late evening statement, Gadkari accused the UPA government of spreading disinformation about him.
"I have committed no wrong or any impropriety either directly or indirectly. Yet the UPA government has been making an effort to spread disinformation about me in order to hurt me and my party... I do not wish that this should in any way adversely affect the interest of the BJP. I, have, therefore decided not to seek a second term as the president of the BJP," he said.
Earlier in the day, Gadkari had issued another a corrected statement terming "as calculated, mischievous and politically motivated the Income -Tax department's attempts to drag his name" into its surveys of various companies in Mumbai.
His first statement of the day had talked of the IT survey coming on the eve of his "re-election as BJP president for a second term".
Sinha, who has been against Gadkari's continuation as president, caused a flutter as he collected a nomination form and a copy of the voters' list from presidential poll in-charge Thawarchand Gehlot.
Another Gadkari-baiter and former member of the BJP's national executive, lawyer Mahesh Jethmalani had indicated Monday that he could contest against Gadkari if no one else does.
BJP sources said that Rajnath Singh was expected to file nomination Jan 23 morning. The announcement of new president is expected to be made later in the day.
Party sources said Sushma Swaraj's name was also being mentioned as a probable candidate but she had not accepted the offer so far.