Mr Rudd will be the Prime Minister and will take the Labor Party to the election after winning a leadership ballot 57 votes to 45, deposing Julia Gillard.
He said politics "has failed the Australian people" through negativity, vitriol, and an erosion of trust. "It's been holding our country back and all this must stop," he said, adding he decided to come back to beat the Opposition at the election, which may now be in August.
"I simply do not have it in my nature to stand idly by and allow an Abbott Government to come to power ... by default," he said.
He said he understood why young people had stopped liking or respecting the political system.
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Kevin Rudd and Anthony Albanese speak to the media following the leadership ballot. AP Photo/Rick Rycroft
"I understand why you've switched off, it's hardly a surprise, but I want you to please come back and listen afresh," he said.
Ms Gillard saw him off three times, but last night's fourth was the end of her.
"I understand that at the caucus meeting today the pressure finally got too great for many of my colleagues," she said last night.
"I do say don't lack the guts, don't lack the fortitude ... to go out there and win this election. I know that it can be done."
Prime Minister Kevin Rudd and deputy Prime Minister Kevin Albanese with party supporters after the meeting. Picture: Gary Ramage
Last night she went to see Governor-General Quentin Bryce to ask her to commission Mr Rudd as Prime Minister.
She will then say "hello and goodbye" to her electorate, Lalor, before quitting politics at the election.
South Australian Senator Penny Wong was elected as Senate Leader. She emerged from the ballot at Mr Rudd's right shoulder.
Other senior Labor MPs, including Wayne Swan and Peter Garrett, have stepped down from Cabinet or resigned. Anthony Albanese was elected deputy leader, beating Simon Crean by 67-38.
Wayne Swan and Julia Gillard with her party supporters after the meeting. Picture: Gary Ramage
Mr Rudd now needs to prove he can form a minority government in order to get Ms Bryce's tick of approval.
The Governor-General last night was seeking advice from the acting Solicitor-General about the constitutional impacts of the leadership change.
Tasmanian independent Andrew Wilkie said that he would support Labor in the House of Representatives.
Both Ms Gillard and Mr Rudd pledged to quit politics at the election if they lost, and it is not clear what Ms Gillard will do next.
Opposition Leader Tony Abbott said Australians "deserve better than this", and should get an election so that voters and "not the faceless men" elected the next Prime Minister.
"Yet again the powerbrokers of the Labor Party have changed the prime ministership," he said.
"If you want real change, if you want a strong and stable and unified government there's got to be an election and there's got to be a vote for the Coalition," he said.
The Prime Ministerial decision came at the end of one of the nation's most tumultuous days in politics.
Ms Gillard, again, called Mr Rudd and his supporters into the open by bringing on the spill.
After a Question Time in which she remained calm and focused on the economy and the Gonski education reforms (which passed the Senate yesterday) she went on television to declare there would be a ballot last night. She also demanded that the loser of the ballot step down, instead of "floating around".
"I believe anybody who enters the ballot tonight should do it on the following conditions. That if you win, you're Labor leader but if you lose, you retire from politics," she said.
Mr Rudd swiftly responded, saying he had changed his mind after promising he would not stand again.
"The truth is many many MPs have requested me for a long long time to contest the leadership of the party because of the parlous circumstances we now face," he said in reference to a series of dire polls.
"These are the three core reasons why I have changed my position on leadership: The requests that I've received from my colleagues, my belief the Australian people deserve competitive choice at the next election and my fear that if we don't offer it Mr Abbott will win by the biggest landslide since Federation." He promised he would dedicate himself to uniting the shattered party and said there would be "no retributions, no paybacks".
Mr Rudd said people were very afraid an Abbott government would bring back its old WorkChoices regime.
Families were also afraid of what the Coalition would do to penalty rates and overtime, what could happen to their jobs, what could happen to pensions and what would happen to the environment.
Before yesterday, Mr Rudd had consistently said there were no circumstances under which he would challenge for the leadership.
"I will leave it to you, the Australian people, to judge if I have made the right call," he said.
A turning point came just before caucus met when Workplace Relations Minister Bill Shorten, who helped Ms Gillard into power, threw his support behind Mr Rudd.
Earlier in the day he was forced once again to deny rumours he had switched sides and was backing Mr Rudd. "I have carefully considered my position ... I have now come to the view that Labor stands the best chance to defend the legacies of this Government with Kevin Rudd as our leader," he said later.
Just minutes later Ms Gillard walked into the caucus meeting flanked by supporters including Member for Adelaide Kate Ellis. Mr Rudd walked in alone, wearing a blue tie.
The day had begun with independent MPs Rob Oakeshott and Tony Windsor announcing they would quit politics at the election.
Those two men helped deliver Government to Ms Gillard, and it is likely their seats will now go to the Coalition.
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