Martin Schulz could take over from Angela Merkel as German Chancellor
Mr Schulz, the former President of the European Parliament, is arguably Britain's most outspoken critic and is likely to push for a hardline approach to Brexit from the Brussels bloc.
With calls in France and Italy to also leave the EU, Mr Schulz's Chancellorship election would spark fears of Britain getting a rum deal.
Sigmar Gabriel, the current vice-chancellor, told a meeting of the centre-left Social Democratic party (SPD) on Tuesday afternoon that he would not seek its nomination as a candidate, paving the way for the Jean-Claude Juncker loving Europhile to challenge "Mother Merkel" for Germany's top job.
Mr Gabriel said: "There are two basic requirements to lead a successful election campaign: the party must believe in the candidate and gather behind him, and the candidate himself must want it with every fibre of his heart.
"Neither of these apply to me in sufficient measure."
If Schulz takes over he could push for a bad Brexit deal for Britain
But Mr Schulz, 61, still needs to gain a lot of ground on Mrs Merkel's Christian Democratic Union Party, currently in coalition with the SDP.
Mrs Merkel's party have 33.5 per cent of the popular vote sewn up, according to the polls, whereas Mr Schulz would only have 21 per cent.
The hard-right Alternative for Deutschland (AfD) currently only has 13.5 per cent.
'MERKEL MUST GO': Brussels protest against German Chancellor
Thu, January 12, 2017
Angry campaigners held placards with slogans reading 'Merkel not welcomed' and 'Merkel must go' following a spate of terror attacks against Germany.
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Protest on the sidelines of Angela Merkel's official visit in Brussels
One of the main reasons behind Mr Gabriel's resignation from the Chancellorship challenge is that Mr Schulz polls so much higher than he does.
A recent survey found only 19 per cent of Germans would vote for Mr Gabriel over Mrs Merkel, whereas 36 per cent would elect Mr Schulz.
In the wake of the Brexit election victory, Mr Schulz said: "The fact is the government expected a different outcome, a different result.
"That shows you should never play with fire."
Schulz could run Merkel close, according to opinion polls
He also slammed then Ukip boss Nigel Farage by referring to him as "a quisling", another word for traitor.
The German election takes place on September 24 2017.