Updated: 4:18 p.m.

White House Chief of Staff William Daley is stepping down and will be replaced by Office of Management and Budget Director Jacob Lew, President Barack Obama announced today.

The shuffle, first reported by the Los Angeles Times, will take effect at the end of the month. In a surprise to the president, Daley submitted his resignation Tuesday, and Obama said he told him to take a few days to reconsider but Daley reaffirmed his desire to return to Chicago and spend more time with his family.

“I have been honored to be a small part of your administration,” Daley wrote in his resignation letter. “It is time for me to go back to the city I love.”

“Obviously, this was not easy news to hear,” Obama said, flanked by both men at the White House today. Obama ticked off some of the highlights of Daley’s one year at the helm, including plotting the raid on Osama bin Laden’s compound in Pakistan, the end of the war in Iraq, the revolution in Libya, the enactment of three free-trade agreements and a $2 trillion deficit reduction deal.

“Chicago is only a phone call away, and I’m going to be using that phone number quite a bit,” Obama said.

But it was only a few months ago that the White House shuffled some of Daley’s duties to senior adviser Pete Rouse and Daley announced that he would not continue as chief of staff beyond 2012. Rouse served as interim chief of staff when former Chief of Staff Rahm Emanuel stepped down to run for mayor of Chicago.

When Rouse took over some of Daley’s duties, Republicans interpreted the move as a sign that Daley — seen as someone who could work with the other side of the aisle and the business community — had been marginalized as Obama’s team geared up to run for re-election on a strategy of blaming Congress.

Democrats have not always been happy with Daley either.

Senate Democrats complained last year that they sometimes felt out of the loop on debt negotiations between the White House and Republicans, and Daley’s stock also sank with the snafu over the scheduling of Obama’s jobs speech at the same time as a GOP presidential primary debate, aides said.

Much of Daley’s cachet has come from his relationships with Republicans, particularly with Speaker John Boehner, and the scheduling dispute with the Ohio Republican reinforced his lack of pull, one aide said.

Lew has been the administration’s wonk-in-chief in its battles with the GOP on spending and the debt — issues that will continue to dominate this year considering the payroll tax cut and unemployment benefits will expire at the end of February, while the expiration of the Bush-era tax cuts and automatic spending cuts are all on track to take effect Jan. 1, 2013.

Obama said Lew will “make sure that we don’t miss a beat” and he noted his extensive budget experience as well as his foreign policy chops having served in the State Department under Secretary of State Hillary Rodham Clinton.

OMB spokesman Kenneth Baer released a statement indicating that Lew would finish Obama’s fiscal 2013 budget before taking over at the White House, but he indicated that a decision on who would replace Lew has not been made.

“Jack will be staying at OMB to finish the 2013 budget. There is a very talented and committed senior team here at OMB. Whatever decision the President makes about who is to lead the agency, there will be a continuity of leadership at the highest levels,” Baer said.