Angela Merkel's hand-picked choice for the ceremonial post of president resigned on Friday in a scandal over political favours, dealing a blow to the German chancellor in the midst of the euro zone crisis.

In a curt five-minute statement at the Bellevue presidential palace, Christian Wulff said he had lost the trust of the German people, making it impossible to continue in a role that is meant to serve as a moral compass for the nation.

"For this reason it is no longer possible for me to exercise the office of president at home and abroad as required," Wulff said, standing next to his wife Bettina.

Merkel postponed a trip to Rome where she was to hold talks with Italian Prime Minister Mario Monti and made a brief statement after Wulff spoke, saying she regretted his departure.

The situation changed dramatically for Wulff on Thursday evening when state prosecutors in Hannover asked parliament to end his legal immunity over accusations he accepted favors in a prelude to opening an investigation into him.

It is the first time ever that prosecutors have wanted to investigate a German president and the move triggered direct calls from opposition parties for the 52-year old Wulff to go.

He is the second president to step down within two years. His predecessor, former International Monetary Fund chief Horst Koehler, resigned unexpectedly in 2010 after coming under fire for comments he made about the German mission in Afghanistan.

Until now, Wulff, who was conservative state premier of the state of Lower Saxony before becoming president, had said he would stay in office to clear his name. He reiterated his desire to hang on to his post in a briefing with journalists on Thursday evening.

At a time when Merkel is trying to solve the crisis enveloping the single currency bloc, the last thing she needs is the distraction of a presidential resignation and a potentially divisive search for a replacement.

Analysts say Wulff's departure could become a problem for Merkel's Christian Democrats (CDU) who are struggling to retain control of the states of Schleswig-Holstein and Saarland in elections later this year.

The resignation reflects badly on Merkel's judgment as she forcefully pushed for Wulff's election against a strong opposition candidate who polls show was backed by most Germans. Merkel said she would talk to the opposition this time to find a consensus candidate.

Consequences

"This won't be without consequences for Merkel, her reputation will suffer from it," said Gerd Langguth, political scientist at Bonn University.

"She has a good ratings in opinion polls at the moment but what effects it will have on her depends who she names as a new candidate and whether they are convincing or not. If not, she could have problems," he said.

Wulff's image as head of state has suffered badly in recent months and he has been mocked in the German media.

He belatedly apologised for misleading the Lower Saxony state parliament about a cheap 500,000 euro ($650,000) home loan from a businessman friend.

Wulff also admitted to making a "grave mistake" by leaving a message on the answering machine of the editor of Germany's best-selling Bild newspaper threatening a "war" if the daily published a story about his private finance dealings.

He was later criticized for accepting free upgrades for holiday flights for himself and his family as well as staying free of charge at the holiday villas of wealthy businessmen.

A possible successor is Joachim Gauck, an anti-Communist human rights activist in East Germany who ran against Wulff in 2010 and embarrassed Merkel by forcing the election into a third round.

Other potential candidates include Defense Minister Thomas de Maiziere, Labor Minister Ursula von der Leyen and possibly Finance Minister Wolfgang Schaeuble, though shifting him to Bellevue palace would leave a gaping hole in Merkel's cabinet in the midst of the euro zone sovereign debt crisis.