A resignation was expected...and Justice O'Connor was rumored, but this still comes as a bit of a surprise.
NPR's report here.
Bush Admin has got to regroup REALLY quickly, I would assume. They are going to have to turn their search for a Chief replacement (and a hard-line conservative which they could have pushed to replace Rehnquist) to an O'Connor replacement. That will potentially entail another woman (no women had made the original short-list - see that list here), or more of a moderate.
This move likely favors Alberto Gonzales and also Edith Jones and Edith Clement, both of the 5th Circuit. (More on Jones here... Clement here... and more on Gonzales here.)
More to come.
UPDATE: The Washington Post already has a good article up - click here.