Mubarak said he will work through the rest of his term with the intention to take "necessary steps for the peaceful transfer of power."
In a Tuesday evening news conference, President Barack Obama challenged Egypt's Mubarak, a staunch U.S. ally, to immediately begin the process of transitioning the country to new leadership, a signal that there should be no drawn-out goodbye.
Obama said he had spoken to Mubarak to press his case for 30 minutes shortly after Mubarak addressed the Egyptian people.
Just hours before Mubarak's announcement, a special envoy dispatched by President Barack Obama urged the embattled Egyptian president not to seek re-election.
A retired U.S. ambassador to Egypt was apparently sent by Obama to deliver the message from the White House on how to best prepare for an "orderly transition," ABC News reported.
The moves signaled that after a week of carefully balancing support for protesters and its close ally of three decades, the U.S. has decided that continued backing for Mubarak as president was untenable.
An estimated 250,000 people were on the streets Tuesday in Cairo's main square in the largest demonstration against Mubarak.
It appears that the uprising that started with protesters successfully replacing the government of Tunisia is having a domino effect.
The king of Jordan said his government is out. He's asked an ex-general to form a new cabinet.
Mubarak installed a new cabinet on Monday, but for many protesters, that's not enough.
Protesters were hanging effigies representing Mubarak on Tuesday. On the dolls' faces were the star of David and images of the U.S. Capitol building. The implied message seemed to be that Mubarak is too close an ally of the U.S. and Israel.
That leads to the question of what happens to Egypt's relationship with the U.S. if Mubarak is replaced.
One name being floated as a potential president is Mohamed ElBaradei. He served as the U.N.'s chief nuclear-arms watchdog, won the Nobel Prize and spent 15 years living in the U.S.
"I always said, if people want me to run, I would not let them down. But that's not my priority," said ElBaradei.
Protesters defied a government transportation shutdown. They've only had spotty Internet and cellular phone service to organize.
The size of the crowd is hard to estimate. ABC News is reporting 250,000 people, yet Al Jazeera said they've reached a million. The protest is largely peaceful and the military is refusing to stop it.
Meanwhile, the U.S. State Department has ordered all non-emergency U.S. personnel to leave Egypt. However, getting out of Egypt continues to be a major challenge. More than 75 percent of EgyptAir's flights aren't running because crewmembers didn't show up to work.
The Associated Press and ABC News contributed to this report.