Ms Allan, from the party's left faction, fell on her sword on Tuesday morning ahead of a caucus meeting where she was expected to lose a spill motion.
She initially flagged she would fight to keep her job after a cross-factional delegation, including six ministers, informed the embattled leader she had lost majority support of the caucus.
"After speaking with my colleagues overnight, I have made the difficult decision to step aside as leader of the Victorian state parliamentary Labor Party, and as premier of Victoria," Ms Allan said.
"I will shortly chair a caucus meeting to elect a new leader.
"Should Ben Carroll emerge as our next Labor leader and Labor premier, he will have my congratulations and unqualified support."
Her resignation paves the way for Mr Carroll, her deputy and the state education minister, to be appointed her successor uncontested.
Unless another candidate nominates, it would avoid a weeks-long election process involving votes of Labor MPs and rank-and-file members, four months out from the state election.
"I was prepared to put my record and my plan to a ballot of members, as our rules allow," Ms Allan said.
"I believe I would have won but doing so this close to an election takes up valuable resources, including the most precious one: time."
Ms Allan, who described herself as a team player, said she was proud to have served as Victoria's second female premier and would have relished leading Labor into the November election.
"I was more than ready. I saw off two Liberal leaders. Now, I expect my successor will see off the third," she said.
She left the media conference without answering any questions, including whether she would remain remain in parliament after serving as the member for Bendigo East since 1999.
"Thank you and goodbye," Ms Allan said.
Mr Carroll, from the party's smaller right faction, was earlier swarmed by media as he arrived at parliament for the caucus meeting.
"I will have more to say later," he said.
Federal Foreign Minister Penny Wong said politics was a tough game and good people had to do "difficult things" at times.
"Obviously, whatever the outcome, we will be working with them in the lead-up to state election," she told ABC TV.
There was no guarantee Mr Carroll can lead Labor to a record fourth-straight election victory if he were to become premier, Redbridge pollster and former Liberal strategist Tony Barry said.
A significant cabinet reshuffle and policy overhaul would be needed to differentiate Mr Carroll's politics from Ms Allan's and subsequently remedy the drop in voter support for Labor incurred under her leadership, Mr Barry said.
"There's going to have be changes around the Suburban Rail Loop and other things where he differentiates himself from Jacinta Allan," he said.
"Otherwise he's going to be completely open to the attack of same horse, different jockey.
"In that situation, he might make a bad situation even worse."
Support for Labor has been diminishing in the polls since the last election, with fresh Newspoll figures from The Australian indicating the party's primary vote is trailing the Victorian coalition on a two-party-preferred basis 52 to 48 per cent.
Ms Allan had faced mounting pressure in recent months following revelations of corruption on Big Build projects.
She refused to call a royal commission into the sector after corruption-busting lawyer Geoffrey Watson estimated it had cost the state $15 billion.
Persistent crime and a failure to reach a pay deal with public school teachers have also dogged the government.
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