Jean-Claude Juncker, prime minister for 19 years, lost out Friday when Luxembourg's Grand Duke called on Liberal leader Xavier Bettel to form a new coalition government with the Socialist and Green parties.
"Having taken note of the willingness (of the three parties) to form a new government," Grand Duke Henri "has tasked Bettel with forming the new government," a palace statement said.
"It's a heavy responsibility that awaits me if we are to meet the challenges we face," said Bettel, who at 40, is in line to take office at an even younger age than Juncker did.
Current mayor of Luxembourg city and a criminal lawyer by trade, Bettel, and the leaders of the Socialists and the Greens will open their formal talks on forming a coalition government on Tuesday.
Veteran eurozone dealmaker Juncker had been premier since 1995 and in Luxembourg's government since 1982, with his Christian Social People's party (CSV) in power for all but five years since 1944.
On leaving a summit of EU leaders in Brussels, in a caretaker capacity, Juncker refused to comment on the Grand Duke's decision, but said: "My state of mind is not that of someone who is retiring from national politics, quite the contrary."
Juncker's CSV won the biggest share of the vote and the largest number of seats in polls last weekend.
It took 23 seats in the 60-seat Luxembourg chamber, to 13 for Bettel's Liberals, 13 for the Socialists and six for the Greens.
When the results came through, Juncker said this gave him the right to be the first to try and form a government. But Bettel insisted that a combined total of 32 seats from the three lesser parties constituted a parliamentary majority.
Bettel said after the three parties agreed to cooperate that he hoped to be in a position to finalise a government by early December.
Juncker remains in caretaker charge for now.