President Fujimori said he would not stand again

Former presidential candidate Alejandro Toledo called for a transitional government to be formed immediately, and for the opposition to rally around a single candidate. He says he plans to run for president again.

Mr Toledo pulled out of the May presidential runoff after alleging that Mr Fujimori planned to rig the results.

Correspondents say the announcement has stunned the country, prompting spontaneous scenes of celebration.

People poured onto the streets shouting freedom and calling the decision a great victory for democracy.

Our correspondent Claire Marshall said the mood in the capital, Lima, was one of jubilation, with hundreds of people emptying out from bars and cafes to carry banners, beat drums and wave flags.

The streets of Lima filled with jubilant opposition supporters

Marching down the street, people shouted out "we are free now", and passing cars, taxis and buses honked their horns in unison.

Leading a crowd of about 200 down one of Lima's main streets, Cezar Ramiro, from one of the main pro-democracy movements, said: "We are very happy because we have been asking him to go since April, and now he's gone".

Another opposition supporter, Mani Dammat, said that the president's surprise announcement was finally the end of a 10-year-long fight for liberty.

Opposition demands for new elections have increased since the scandal about the video broke.

Not me: Kouri denies that he took a bribe

Mr Montesinos, long considered the power behind the government, was seen apparently handing over $15,000 to Luis Alberto Kouri, who recently defected from the opposition to the governing party.

An Organisation of American States statement on Saturday said the accusations were "of the utmost seriousness and require rapid, radical action from the government".

The United States also expressed its concern, and there were demonstrations in the Peruvian capital, Lima, calling for Mr Montesinos' arrest.

The opposition saw the video as proof that Mr Fujimori used bribes to win opposition party defectors over to his side after the April elections, which left his party with fewer than half the seats in Congress.