Khanal told the CPN-UML leaders at the party''s Central Committee meeting that he would step down today evening.
Prime Minister is scheduled to tender his resignation to President Dr Ram Baran Yadav, Khanal''s press advisor Surya Thapa told PTI.
The main opposition Nepali Congress, his key ally Maoists and the Terai-based Madhesi Front have stepped up pressure on Khanal to to honour his commitment to step down as part of the May 29 five-point deal he had signed while extending the term of the 601-member Assembly on May 28 by three months.
"There is no alternative to the PM''s resignation," NC said Ram Sharan Mahat, the Nepali Congress leader said earlier today.
CPN-UML leader Khanal, who was elected prime minster on February 3 after 17 rounds of polls in Parliament, had said earlier this month that he would resign if there was "no concrete" progress on the 2006 peace process.
A key issue that has stalled a national government is the future role of the former Maoist guerrilla force housed in different camps in the country.
During several rounds of talks with political parties, the Maoist leaders have ruled out the integration of the former combatants within the August 13 deadline.
The Maoist party, the single largest group in parliament, and the Nepali Congress have claimed the right to lead a national government.
However, the political parties have failed to find a common ground on the contentious issues of the peace process, constitution drafting and a new national government to succeed Khanal-led coalition.
Nepali Congress leader Nidhi expressed confidence of forming a new national unity government under the leadership of his party.
"CPN-UML has assured to support the Nepali Congress candidate for Prime Minister and the Madhesi parties are also likely to support us, the next Prime Minister will be led by our party," he told PTI.
As Deuba enjoys support from majority of the party''s parliament members, he will contest the election for the post of Prime Minister from the party, he said.
Nepal is heading towards a fresh political crisis as the term of the Assembly is set to expire later this month and it is unlikely that a new constitution will be drafted within the period.
Analysts said the political parties should forge a consensus to extend the term of the Assembly beyond August 31 and the next government be vested with two main responsibilities of concluding the peace process and drafting the constitution.
Integrating the 19,000 former Maoist guerrilla forces into the national army is one of the key sticking points in the stalled peace process, with military leaders and the Nepali Congress resisting the move.
The UCPN-Maoist has 238 seats and the CPN-UML has 108 seats in the Assembly, which acts as the country''s interim Parliament. The second largest Nepali Congress has 114 members in the House.
The Assembly, formed in 2008 after a popular election, has failed to fulfill its main function to draft a new constitution though its term was extended twice, the latest on May 29 which is set expire in end of August