Eagle, who had resigned as business secretary from Corbyn's shadow cabinet last month,said she was backing out so that there was just one candidate left in the race — Owen Smith.
"I am withdrawing from this race and supporting Owen," she said in a statement.
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He has now emerged as a so-called "unity candidate" in the race to replace Corbyn.
"I am supporting Owen with all my enthusiasm and might," said Eagle, who was the first challenger to come forward earlier this month.
Smith and Eagle had reportedly reached an understanding that the one with the fewest nominations within the party hustings this week would stand down and become a part of the other's campaign.
If Smith goes on to defeat Corbyn in the September election, Eagle would be appointed to a key shadow cabinet post.
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