Mr Parker threw his support behind Mr Shearer, whose key remaining rival is finance spokesman David Cunliffe.
In a brief statement this afternoon Mr Parker confirmed his decision and said he remained committed to Labour ideals and will work hard to achieve them.
"There is growing support for a new face to lead the Labour Party. I intend to support David Shearer in his bid.''
It is understood Mr Parker is withdrawing because the bloc within the Labour caucus that opposes Mr Cunliffe's bid was split between him and Mr Shearer.
"Obviously this has lifted my chances,'' Mr Shearer told National Radio this afternoon.
He said he was surprised when Mr Parker informed him of his decision about an hour before he announced it.
"But I was very, very pleased he was willing to endorse me. We are colleagues and friends _ we actually share a flat in Wellington when we're down here.
"Obviously he does bring more support. There were people that were supporting him but those people have a choice as well, they may decide to support David Cunliffe so the job is by no means over and I need to earn the support of my colleagues and I'm still doing that.
"Obviously when you get one person pull out of the race a two-way race rather than a three-way race makes the odds better.''
Mr Shearer, a former high ranking United Nations official who entered Parliament in 2009 when he won the by-election for the Mt Albert seat vacated by Helen Clark, has been the favourite among the three contenders according to an unscientific poll of Herald online readers.
Current leader Phil Goff and his deputy Annette King step down on December 13.
The remaining contenders to replace Mr Goff will take to the roads over the next fortnight to make their pitches to party members in a far more open process than the party has followed in the past.
The position will be chosen by caucus in a secret ballot.
Although only caucus can vote on the leadership, the candidates will travel around the country to a series of meetings with party members in Auckland, Hamilton, Wellington, Christchurch and possibly Dunedin to set out their case.
The party has opted for a more open process, partly because of criticism about the swift handover to outgoing leader Phil Goff after Helen Clark resigned.
President Moira Coatsworth said some Labour parties overseas involved members in the formal process of selecting new leaders.
She had suggested to caucus on Tuesday that the party here picks up elements of that by organising the roadshow to allow members to talk to the candidates and give feedback to their local Labour MPs.
