Liberal Leader Stéphane Dion leaves a news conference in Ottawa Monday, after announcing he will resign as Liberal leader but will stay on until a leadership convention is held. (Adrian Wyld/Canadian Press)

Liberal Leader Stéphane Dion said Monday he will step down after a leadership convention, blaming his party's losses in the federal election mainly on its inability to counter Conservative "propaganda" against his Green Shift carbon tax.

"I will remain as leader in order to ensure a smooth and successful transition," Dion said.

Dion made the announcement at a news conference in Ottawa, following his party's poor showing in the Oct. 14 federal election. In the worst results in terms of popular vote for the Liberal party in more than 100 years, the Liberals took 76 seats in the election. Going into the election, the Liberals held 95.

"I still think that if we would have been equipped to explain why I'm fighting for my country, what kind of leader I would have been, what kind of prime minister I would have been and what kind of policy we're proposing, we would have won this election and we would have today a much better government than the one we have," he said.

While Dion said he accepts "his share of the responsibility" for the results, he blamed them in part on a Tory campaign that he said created a false picture of who he is.

Canadians "believed that that character was real," he said.

He also said the Conservatives had a "massive financial advantage" to "distort" his Green Shift plan and that the Liberals did not have the resources to fight back "given our existing financial crisis."

"It has been a mistake to go ahead with the Green Shift because we are not equipped to explain what it was," he said.

Dion said Tory "propaganda" about the plan was cemented in the minds of Canadians and "was the main reason why we lost."

Liberals react to announcement

Liberal MP Bob Rae told the CBC's Susan Bonner on Politics that he was proud of Dion's decision and that "he's fully entitled to stay on as leader until the convention. He's leader of the party."

Rae declined to discuss whether he'd run in the upcoming leadership race, as he did in 2006.

"I don't think today's the day to do that," he said.

Liberal MP Francis Scarpaleggia, who is one Dion's most loyal supporters in the caucus, concurred with Rae, adding he believes Dion will be effective in Parliament.

"He will be a fierce opponent to Mr. [Stephen] Harper in the next few months while he remains interim leader," he said. "I'm sure Mr. Harper doesn't consider this good news from his point of view."

Other political observers disagreed. Former Liberal MP Liza Frulla said someone such as MP John McCallum, Royal Bank's former chief economist, may have been a better choice as interim leader considering the economy will be front and centre in the next few months.

Last week, the Conservatives won another minority government after they took 143 seats in the House of Commons. The NDP secured 37 seats and the Bloc Québécois took 50. Two seats in the House were earned by Independents.

The Liberals captured only 26.2 per cent of the popular vote — two points lower than the party's disastrous 1984 finish with John Turner at the helm and only four points ahead of the party's worst-ever results in 1867.

Dion has been criticized for failing to communicate with Liberal candidates during the campaign and for failing to sell the party's proposed carbon tax. Dion had said the carbon tax plan, aimed at weaning people off fossil fuels, would be revenue neutral and offset by broad-based business and personal tax cuts.

Prime Minister Stephen Harper, who, leading up to the election, had dismissed the plan as nothing but a cash-grabbing device to raise taxes, continued to pounce on it during the campaign. Harper warned there would be dire economic consequences were the plan implemented.

Dion, who served as intergovernmental affairs minister under Jean Chrétien and environment minister under Paul Martin, claimed the party leadership on Dec. 2, 2006. His victory came as a surprise to most after he finished third with less than 18 per cent of the vote on the first ballot.

But with the backing of leadership candidate Gerard Kennedy, Dion was able to vault past the two star candidates, Michael Ignatieff and Rae, now considered the front-runners in the upcoming leadership race.

Ignatieff, Rae and Kennedy, along with former New Brunswick premier Frank McKenna and former deputy prime minister John Manley, have been suggested as possible leadership candidates.

With files from the Canadian Press