'I'm withdrawing from this race and supporting Owen,' Eagle told journalists in parliament after Smith secured more nominations from the party's members of the British and European parliaments.
Challenger Angela Eagle withdrew from the contest to lead Britain's main opposition Labour Party on Tuesday and backed rival Owen Smith in a unity bid to oust embattled leader Jeremy Corbyn.
"I'm withdrawing from this race and supporting Owen," Eagle told journalists in parliament after Smith secured more nominations from the party's members of the British and European parliaments.
Smith will now go forward alone to fight socialist stalwart Corbyn in a ballot of party members, trade unionists and registered supporters which ends on September 24.
Labour is in deep crisis with Corbyn wildly popular among the party's grassroots, but deeply at odds with an overwhelming majority of his MPs.
They believe he is an incapable leader driving the party towards another crushing general election defeat in 2020 with an uncompromisingly leftist platform that cannot win over swing voters who backed the Conservatives at the 2015 election.
Eagle was the first to announce a challenge in the aftermath of Britain's June 23 referendum vote to leave the European Union.
Labour's policy was for Britain to stay in the EU but Corbyn, who has a long history of euro scepticism, was accused of leading a half-hearted campaign that failed to stir traditional Labour-voting areas. Corbyn lost the support of three-quarters of the party's MPs in a subsequent vote of confidence on June 28 but refused to step down, triggering Eagle, and then Smith, to come forward.
"We have a Labour Party at the moment that is not working. We've got a leader that doesn't have the confidence of his members of parliament and isn't reaching out to the country," Eagle said.
"We need to have a strong and united Labour Party so we can be a good opposition, take the fight to the Conservative government and heal our country.
"So I am announcing tonight that I will be supporting Owen."
"We are going to be in lock-step together arguing for an effective, united Labour Party."
Leadership challengers needed to get the nominations of 20 per cent of the party's MPs and MEPs.
The party's governing National Executive Committee decided that Corbyn would automatically go onto the ballot: the Labour rule book did not say whether the leader also needed nominations -- something Corbyn would struggle to get.
Smith received 88 nominations -- way more than the 51 needed. His backers included former party leader Ed Miliband and former foreign minister Margaret Beckett.
It is understood Eagle withdrew to prevent the publication of the names on her list in the hope of avoiding creating rival camps among anti-Corbyn MPs.
The nominations-gathering process officially closes at 1600 GMT on Wednesday, triggering the formal contest.Labour had been out of power since 1979 until prime minister Tony Blair led them to three straight general election victories from 1997, on a centrist platform.
They have been out of office since 2010.
"We do need a new generation of Labour men and women to take this party forward and get us ready for government once more. We've been on the sidelines for too long," Smith said.
He said Eagle would be his "right hand woman", adding: "I absolutely cannot do without her."
"It's time to move on from Jeremy."
"The country has to look at us and say, 'we can imagine these people running our country, and doing it better than the Conservatives'."
Corbyn was elected in September with 60 per cent backing from Labour members, trade unionists and registered supporters.
A YouGov poll for The Times newspaper put Corbyn on 56 per cent support, with 34 per cent for Smith in a straight, two-way battle.
The leadership contest has been marred by incidents of violence and intimidation. A brick was hurled through Eagle's office window.
The incident followed repeated complaints by Labour MPs -- particularly women -- that they have been subjected to threats and abuse from Corbyn's grassroots supporters if they speak out against the party leader.