Ms Nahles, 47, is the head of the SPD’s parliamentary group and is expected to become caretaker leader before she is confirmed as leader at the party conference.
Mr Schulz, 62, announced he would step down as leader of the party last week to become foreign minister under a new coalition with Angela Merkel.
But he has since withdrawn from the race to become foreign minister, after promising not to service in a Merkel-led government before the election, according to German publication Suddeutsch Zeitung.
The embattled leader of the SPD abruptly gave up plans to become its next foreign minister on Friday, hoping to shore up support among SPD members for a new coalition with Mrs Merkel’s conservatives.
His decision drew strong criticism from members of his own party.
The change of leadership comes as Mrs Merkel becomes increasingly anxious to get a government in place and end more than four months of political limbo which has hampered decision-making in Germany, Europe’s largest economy.
The lack of leadership has caused concern among partners in the European Union which looks to Berlin for leadership in facing challenges from eurozone reform to Brexit.
Mr Schulz, who originally strongly opposed another tie-up with the conservatives only to become one of its leading advocates, has lost political credibility but hopes his decision to step aside will now encourage SPD members to back the coalition deal.
A Forsa poll had indicated almost three-quarters of Germans thought Mr Schulz becoming foreign minister would be a mistake, especially after a more than disappointing performance by the party under his leadership.
Mr Schulz said: “I sincerely hope that this (decision) will end the personnel debates within the SPD.”
His successor Ms Nahles said the party would now focus on policy content ahead of the ballot.
Speaking on Mr Schulz’s decision, she said: “I know it wasn’t an easy decision for him.”
Ms Nahles told reporters in her home village of Weiler in western Germany Mr Schulz deserved respect and recognition for stepping aside so as not to jeopardise the party vote on the coalition.
The SPD agreed to form a new “grand coalition” with the conservatives, over four months after an election, but the 464,000-strong party rank and file could still scupper the deal in a ballot.
Its results will be announced on March 4.
Many grassroots members of the centre-left SPD are sceptical about another tie-up with the conservatives after serving in a similar coalition in 2013 to 2017.
The SPD then suffered its worst result of the post-war era in September’s election.