Not that this wasn't something that people weren't predicting. I'm actually a bit surprised he lasted as long as he did, considering how scandal-beset he was and how much of a debacle Lebanon was. The Guardian thought that he pretty much had to go, and I can't say I disagree.
But then, who replaces him? Here's the take I saw on Reuters:
Bibi would be a disaster. With Kadima having formed in Sharon's center-right wake, having the rightist rump that is Bibi's Likud take over would be absolutely disastrous.
The following are three scenarios for what might happen next in Israel's shaken political system:
* Israeli opinion polls show Foreign Minister Tzipi Livni and Transport Minister Shaul Mofaz, a former defence chief, are favourites to win the Kadima party leadership contest. Either could forge a coalition similar to the current one. It would take office once sworn in by parliament in late October. Olmert would remain caretaker prime minister until then.
* Some of Olmert's bickering coalition partners may balk at joining a coalition with the more politically moderate Livni if she became Kadima leader.
These parties could swing behind rightist parliamentary opposition leader Benjamin Netanyahu and force President Shimon Peres to ask Netanyahu to try to form a coalition. Such a government might be reluctant to pursue U.S.-backed peace talks with the Palestinians or indirect negotiations with Syria.
* Olmert's resignation could prompt a majority in parliament to opt for an early election. Parliament could dissolve itself and set an election date before the scheduled date of 2010.
An election must be held within five months of the Knesset voting to dissolve itself, but the gap is usually shorter in practice. Recent opinion polls show Netanyahu's Likud party would emerge strongest if a vote were held now.
Such a scenario could leave Olmert as caretaker prime minister until a government is formed after the election.
I don't know Livni or Mofaz too well, but from what I understand, Livni's a big proponent of disengagement from the West Bank. Not that I disagree with that policy--far from it--but I can't imagine Kadima holding together were she to seriously pursue that as PM. But her reputation for being "Ms. Clean" might hold things together in Olmert's wake, as the Israeli people jettison the focus on their relations with their neighbours and the territories in favor of having a clean government for a change.
In any case, it's certainly going to complicate American foreign policy. America could see a very different Israel very soon.