Prime Minister Tony Abbott has called a leadership ballot for tonight, and says he is confident of beating challenger Malcolm Turnbull.
In an extraordinary move, Mr Turnbull this afternoon announced plans to contest the Liberal leadership.
His supporters believe he has the numbers to win, and he has secured the backing of deputy Liberal leader Julie Bishop, which is considered crucial.
The ABC understands Ms Bishop is officially Mr Turnbull's running mate and if Tony Abbott is victorious she will not serve under him.
Social Services Minister and self-confessed leadership aspirant Scott Morrison confirmed through his office that he is sticking with Mr Abbott.
One senior Liberal, and Abbott supporter, said the crucial bloc of votes directed by Mr Morrison could still decide the outcome.
The Government is in a state of turmoil as both camps count the numbers.
It is understood Ms Bishop met the Prime Minister before Question Time to tell him he had lost significant support from the ministry.
After Question Time, Mr Turnbull quit Cabinet and told Mr Abbott he would challenge for the leadership, before calling a snap media conference.