"He just signed the resignation letter in front of party members", Shehan Semasinghe, a legislator from Rajapaksa's party, told Reuters.
The nation has been in political gridlock for over a month since Sirisena replaced former Prime Minister Ranil Wickremesinghe with Mahinda Rajapaksa, who was then twice sacked by parliament but had refused to resign. Rajapaksa was appointed as the premiere on October 26 by the president after sacking Wickremesinghe, plunging the nation into a constitutional crisis.
Wickremesinghe refused to accept the sacking and challenged it in court and in Parliament.
The announcement comes following a meeting of the UPFA parliamentary group under the patronage of President Sirisena and former President Mahinda Rajapaksa, at the Presidential Secretariat earlier today.
Sri Lanka's ousted Prime Minister and leader of the majority United National Party (UNP) Ranil Wickremesinghe will be appointed as Prime Minister again, reports from Colombo say.
The 73-year-old ex-president made no immediate statement to reporters, but his aides said he was returning a fleet of limousines he had used since his disputed appointment.
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But an MP from his party, Lakshman Yapa Abeywardena, told reporters on Friday night that the president agreed to the latest measures to avoid a government shutdown after Dec 31.
Rajapakse's decision came after the Supreme Court confirmed that he could not exercise the powers of a prime minister until he proved his legitimacy, which without enough support in parliament was impossible. Beijing, however, has denied these allegations saying that it had no role in getting the former Sri Lankan president appointed as prime minister. "But the country needs to face situations that it needs to face in January; a country can not function without a budget", Abeywardena said.
The court ruling also meant that the country was effectively without a government and heading for a shut down in the absence of parliament voting for a budget for 2019.
On Thursday, the Supreme Court said Mr Sirisena had acted illegally in November by dissolving parliament and calling snap polls with almost two years to go until elections were due.
The court suspended a proclamation issued by Sirisena on Friday sacking the legislature and calling for elections on January 5.