Chris Fearne will continue to serve as deputy prime minister and health minister in Robert Abela's new Cabinet, making his decision after a series of meetings on Tuesday morning.
The move clears the way for newly-elected Dr Abela to appoint the rest of his executive.
Mr Fearne smiled and said he would speak later when asked about his decision as he walked into the Office of the Prime Minister at Castille.
Sources later told Times of Malta that he had agreed to continue where he left off, with no change to his positions.
There had been questions over Mr Fearne's political future after he was defeated in the race to become Labour leader over the weekend.
Mr Fearne did not attend Dr Abela's first address to the party faithful on Sunday, nor Monday's swearing-in ceremony.
However, the two met several times at Castille on Tuesday, Dr Abela's first full day in the post.
A surgeon by profession, Mr Fearne was praised for his work at the helm of the Health Ministry by Dr Abela during the leadership race.
His decision to also continue as the Labour Party's deputy leader for parliamentary affairs - a post which makes him deputy prime minister - means the party will be spared another leadership race to fill that post.
Dr Abela was meeting with Labour MPs on Tuesday morning as he worked to finalise his cabinet of ministers.
Chris Cardona, Justyne Caruana and Silvio Schembri are among the MPs seen entering Castille.