Richard Dinnen: "Mr Skate said he had resigned to restore political credibility"

"I want to announce my resignation as the Prime Minister of this great nation," Mr Skate said at his official residence.

Mr Skate denied any link between the resignation and the loans from Taiwan, which have caused a regional diplomatic storm as the deal meant relinquishing all long-standing diplomatic ties with China.

Mr Skate was due to face a no-confidence vote next Tuesday in parliament.

He said he had been betrayed by political allies who plan to unseat him and that he had resigned in order to save his government.

Diplomatic tensions

Documents obtained by the news agency Reuters had revealed that Mr Skate had asked Taiwan for US$2.35bn in loans in exchange for dropping long-standing ties with China and recognising Taipei, Beijing's diplomatic rival.

News of the deal on Monday sparked immediate condemnation from China and angered Papua New Guinea's former colonial ruler Australia, which said it feared the deal would lead to instability in the Asia-Pacific region.

China views Taiwan as a breakaway province and has sought to push it into diplomatic isolation. Beijing usually severes ties with states that recognise Taipei.

But Taiwanese foreign minister Jason Hu denied all reports of such a loan.

"Not any promise regarding money has been made in the promotion of diplomacy, least of all cash payment," he said.

No pressure

Mr Skate denied that he had come under pressure from his cabinet to step down.

"No, my ministers did not put pressure on me," he said. "We have looked at all the options and I think it is the best decision."

Mr Skate's coalition partner the People's Democratic Movement recently deserted the government to join the opposition.

Confusion reigned however over the country's immediate leadership.

Mr Skate said he would remain as acting prime minister until the vote next week. Earlier, a government spokesman said that Iairo Lasaro, Mr Skate's deputy, would take over as acting prime minister.

Instability

The BBC's Red Harrison says Australia is very concerned about Papua New Guinea's decision to give recognition to Taiwan over China.

Diplomatic tensions between the four countries have risen sharply since Mr Skate is reported to have flown secretly to Taipei to sign the agreement for the loans.

Both Australia and China warned the decision would bring serious consequences and China asked Australia to intervene.

But Papua New Guinea is an independent country and government spokesmen there and in Taiwan told Australia to keep out of their affairs.

On Wednesday, Papua New Guinea government spokesman Chris Hawkins said Mr Skate's resignation would have no immediate effect on the country's diplomatic recognition of Taiwan.

He added that it would be up to the next prime minister.

Papua New Guinea's economy is in dire financial trouble, with this year's budget facing a critical shortfall and inflation running at more than 20%.