Díaz's withdrawal from the race is another big blow to the fortunes of a party which saw much of its vote gobbled up by smaller left-wing competitors in recent EU elections.
The President of Spain's southern Andalusia region — one of the party's heartlands, and one of the few regions in Spain where the PSOE actually won the recent European elections — says she won't be running for the PSOE top job, to be chosen at a special party conference in July.
Díaz had been pegged as a likely choice for the difficult job after current party leader Alfredo Pérez Rubalcaba recently annouced he would step aside in the wake of the party's disastrous showing in the May European elections.
But Díaz has only held the plum Andalusia president job since September 2013 — a fact which seems to have played a key role in her decision not to stand for the party leadership.
"I have consulted my colleagues and spoken to a lot of people and various factors have led to this decision," she told Spanish radio station Cadena SER.
"I don't want to cheat the people who have put their trust in the PSOE in Andalusia, which means (me) staying here and showing that another type of politics is possible," she added.
Her decision is likely to create more soul-searching for the Spain's major opposition party which won only 23 percent of the vote in the European elections.
That vote went to left-wing parties including the Izquierda Unida and the new Podemos protest party — a four-month old party supported entirely by crowdfunding which was the surprise package in the May EU Parliament elections winning five seats.