Yanukovich has denounced his rival's victory in the re-run of last month's rigged election and is pursuing legal challenges to overturn the outcome.

But in a New Year's address, he admitted the appeals to election authorities and the Supreme Court stood little chance.

"In view of this, there is no point in staying on as prime minister. The political role of the Yanukovich government as a factor of stability in the past year is all but exhausted," he said. "I have taken the formal decision to resign."

The results of last Sunday's ballot, ordered by the Supreme Court, handed West-leaning Yushchenko an eight-point lead over Yanukovich, backed in the contest by Moscow. The vote followed protests in support of Yushchenko to denounce electoral fraud.

In Independence Square, focal point of protests that halted activity in Kiev for weeks, Yushchenko told a crowd well over 200,000 that activists had concentrated the minds of Ukrainians.

"I would like to wish well-being and happiness to every Ukrainian household, so that every Ukrainian can say proudly that he is a Ukrainian, proud of living on Ukrainian soil," he said, a glass of champagne in his hand.

He said hard work could produce improvements even in a year.

"Work for Ukraine with your sleeves rolled up and you will see it will be a different country in a just year," he said. "We are living in a different country already, thanks to you."

Also on stage was Georgian President Mikhail Saakashvili, whose landslide election victory after a "rose revolution" against electoral fraud a year ago inspired Ukrainian activists.

"We held our breath watching you. We admired your courage. The future destiny of Europe was being decided in this square. Good overcame evil in this square," Saakashvili said.