SYDNEY - THE embattled premier of Australia's most populous state, New South Wales, was forced to resign on Friday after his party withdrew support for him over a dramatic reshuffle of his cabinet.

Mr Morris Iemma, 47, was immediately replaced by the relative unknown state Emergency Services Minister Nathan Rees, 40, a fellow member of the centre-left Labour Party, which is led nationally by Prime Minister Kevin Rudd.

'Morris Iemma resigned as premier today, I nominated for the vacancy and I was elected unanimously by the full Labor caucus,' Mr Rees told reporters as he emerged from a meeting of party cadres.

'We start work today for the people of New South Wales, we start work this afternoon to deliver services to the people of New South Wales,' said Mr Rees.

The youthful Rees, who worked as a garbage collector to put himself through university, is a political newcomer, replacing the first Labor premier to be dumped in 117 years, after serving just 18 months in the state parliament.

Mr Iemma's resignation after three years in power follows months of intense criticism from political opponents, media and the public over the state's creaking transport, infrastructure and hospital systems.

The last straw came when he attempted to dump several ministers in a major cabinet reshuffle on Friday.

Iemma sacked his Treasurer Michael Costa late Thursday after their much disputed bid to privatise the state's electricity assets was last week spectacularly shot down by opposition MPs in the state's parliament.

But when he took his proposed cabinet reshuffle to Labour colleagues for approval after sacking Costa, the right faction of the party pulled its support for Mr Iemma, sources at the meeting told reporters.

The New South Wales government is unpopular after more than 13 years of Labour rule and as the state's aging infrastructure shows signs of wear and tear.

Mr Costa, the chief architect of the controversial electricity privatisation plan, fired a final but deadly salvo at Mr Iemma early on Friday.

He revealed the state was facing a sharp drop in revenues as the Australian economy slows, which could cost it its AAA credit rating, while the health budget showed a massive 300 million dollar (S$351.27 million) overspend.

New South Wales, which has a population of 6.8 million people, four million of them in Sydney, is Australia's largest state economy, providing 32 per cent of the nation's gross domestic product. -- AFP