"I dislike to see my party divided," 69-year-old Rajapaksa who ruled the Island nation for a decade said in a statement while handing over the party chairmanship to the new Lankan President Sirisena.
Scores of senior party leaders had joined 63-year-old Sirisena before and after he became the president on January 9.
"With effect from today I will be handing over the leadership to President Maithripala Sirisena", Rajapaksa said in a statement.
He was also the General Secretary of the SLFP. Rajapaksa in the election run-up accused Sirisena of betraying him by leaving the party to be the opposition unity candidate.
It remains to be seen how the other parties in Sirisena's coalition would react to Sirisena now becoming the SLFP president.
Sirisena since becoming President appointed Rajapaksa's arch-rival Ranil Wickremesinghe as Prime Minister and opposition coalition members as his ministers.
Since the election defeat, Rajapaksa has faced a tough time, with the new government accusing him of a failed coup attempt to deny Sirisena victory.
Rajapaksa, who amended the constitution soon after his victory in 2010 to give himself a record third term, had called the election two years ahead of schedule.
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