Microsoft shares leapt as much as nine percent in pre-market trade and closed up 7.3 percent at $34.76, after the surprise announcement sparked a rally in the stock.

"There is never a perfect time for this type of transition, but now is the right time," Ballmer said in a statement.

"My original thoughts on timing would have had my retirement happen in the middle of our company's transformation to a devices and services company. We need a CEO who will be here longer term for this new direction."

Ballmer took over as CEO in 2000 from co-founder Bill Gates, a classmate and friend from their days at Harvard University in the 1970s.

When Ballmer took over, Microsoft was the undisputed tech sector leader, and the world's largest company in market value. But in recent years it has struggled as consumers began to move from desktop and laptop PCs to mobile devices.

While its Windows software is used on the vast majority of personal computers, Microsoft has had little impact in the fast-growing segments of tablets and smartphones.

"Microsoft has clearly been on the wrong track for a long time," said Roger Kay, analyst at Endpoint Technologies Associates. "Essentially Microsoft missed the shift to high mobility entirely."

But Jack Gold, analyst with J. Gold Associates, argued that "Ballmer did a lot for Microsoft while he was there, and his accomplishments should not be diminished by the troubles Microsoft has had the past couple of years."

Still, Gold said that "it really is time for Microsoft to chart a new course and correct some of the issues and challenges plaguing it, and Ballmer was not the right individual to do that."

Microsoft shares, which topped $58 in 1999 adjusted for stock splits during the dot-com boom, have been little changed in the past decade.

Deutsche Bank analyst Nandan Amladi said the news was "a bit of a surprise, coming only about six weeks after the reorganization" announced by Ballmer to focus the company on devices and services.

"We would have expected Ballmer to execute on this strategy for a few years given that it was his brainchild," Amladi said in a note to clients, adding that he was "cautious due to the fundamental headwinds impacting the business."

Citi analyst Walter Pritchard said the resignation was positive for Microsoft.

"Some investors have fantasized about this event and we've often heard 'the stock would be up 10 percent if Ballmer retires,'" Pritchard said in a note to clients, adding that the news "likely puts everything on the table" for Microsoft.

Ballmer, 57, will continue in the interim as CEO "and will lead Microsoft through the next steps of its transformation to a devices and services company," said a statement from the Redmond, Washington, company.

The board of directors has appointed a special committee to direct the process chaired by independent director John Thompson and including Gates, Chuck Noski and Steve Luczo.

Microsoft said it is working with Heidrick & Struggles International, an executive recruiting firm, and will consider both external and internal candidates.

"As a member of the succession planning committee, I'll work closely with the other members of the board to identify a great new CEO," said Gates.

Some Microsoft watchers mentioned names of current or former executives as potential successors, but Citi's Pritchard said: "We expect the company to focus exclusively on outside candidates, meaning that it is very difficult to predict who could be CEO and what direction they will take the company."

Ballmer meanwhile told the tech website ZDNet on Friday that he had started looking at a transition "three or four years ago."

"I agreed to a project with the board where I would meet a bunch of people outside Microsoft who we should have on our radar screen...who might become CEO, and I've reported back to the board on those interactions," Ballmer said.

Nigel Nicholson at the London Business School said he expects a fresh direction.

"Ballmer is supposedly involved in the hunt for a successor, but you can bet that a replicate won't be picked," he said.

"The rise in the share price proves that everyone is expecting some strategic redirection. If Microsoft really wants radical change they'll bring in an outsider." (AFP)