State Sen. Jeff Denham, R-Merced, is ending his campaign for lieutenant governor and running for the Assembly seat being vacated by Tom Berryhill of Modesto.

Denham met in the past two days with Gov. Arnold Schwarzenegger, other GOP leaders and his family before reaching his decision to run for Berryhill's Assembly District 25. It will require him to move out of Merced County and into Stanislaus County.

He said running for the Assembly seat will give him a chance to become a key leader in the Legislature after serving two terms in the Senate.

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Denham will enter the race with more than $1 million in campaign funds he raised to run for lieutenant governor and to beat back a recall campaign last year. He faces former Modesto City Councilwoman Janice Keating, who announced this week that she intends to run for Berryhill's seat.

Keating is a solid fundraiser in her own right, having assembled six-figure war chests for a 2006 race for a Stanislaus County supervisor's seat and to help pass a local government reform measure in 2008.

"This just means it's going to be an exciting, dramatic primary," Keating said.

Denham's decision to drop out of the lieutenant governor's race clears the Republican primary for that campaign, leaving state Sens. Sam Aanestad of Nevada County and Abel Maldonado of Santa Maria. Aanestad and Denham are viewed as conservatives who could've canceled each other in a primary against the more moderate Maldonado.

"It clarifies everything a little bit," said Berryhill, who is endorsing Denham.

"We need people that know how this process works up here," Berryhill said. Denham's "had eight productive years. He's very pragmatic and he's the right guy for the right time."

Denham said his priorities for an Assembly term include enacting budget reforms, curbing government waste and supporting education.

The GOP shake-up follows Sen. Dave Cogdill's decision not to run for re-election this year to represent District 14, which prompted Berryhill to make a run for the Senate instead of trying to retain his Assembly seat.

Denham said he intends to move to Modesto, much of which he represents in Senate District 12. Cogdill is not endorsing a candidate in the Assembly primary yet, his spokeswoman said.

Berryhill described Denham as the "800 pound gorilla" in the primary race for the Assembly seat. That could work against him if conservative voters voice their unrest with Capitol incumbents, said George Petrulakis, a Modesto Republican leader and land-use attorney who is supporting Keating.

"Janice is the type of person Sacramento needs to hear from -- someone who's been in local government who can speak to our frustrations in Sacramento," he said.

Petrulakis said Denham could better serve the Republican Party by keeping his home in Atwater and challenging Livingston Democrat Cathleen Galgiani.

"If Jeff wants to be a leader, I would have thought he would run against incumbent Democrat Galgiani in the seat he lives in instead of moving to what he thinks is a safe seat," Petrulakis said.

Democratic leaders have not identified a candidate to run for the open Assembly seat, which skews Republican in voter registration by 7 percentage points.

"If we have a candidate, I will want someone who's serious and wants to make a real run for it," said Michael Burtch, chairman of the Stanislaus County Democratic Central Committee.