Jim Bunning announced Monday he will drop his bid for a third term in the U.S. Senate, saying he thinks he’s been right on the issues but has been unable to raise “the funds necessary to run an effective campaign.”

“I will not be a candidate for re-election in 2010,” Bunning said in a prepared statement on his Senate Web site.

Bunning was widely viewed as the most vulnerable incumbent Senator on the 2010 ballot and his fundraising has fallen far short of others in the race and was among the lowest of any incumbent nationally.

His announcement comes just before this Saturday’s annual Fancy Farm picnic and opens the way for Secretary of State Trey Grayson, Bowling Green ophthalmologist Rand Paul – both of whom had formed exploratory committees for the race but had not formally announced they’d run – and Elkton businessman and veteran Bill Johnson who has said he is running. Cathy Bailey, a prolific political fundraiser from Louisville and former ambassador to Latvia, is also thought to be considering the race.

Grayson, who formed his exploratory committee with the blessing of his long-time friend Bunning, said Kentucky has “been blessed” to have Bunning as Senator and before that a member of the U.S. House. He wasted no time indicating he’s running now that Bunning is out.

“I will soon transition my exploratory committee to an official campaign committee,” Grayson said. “But today it is appropriate that we honor the exceptional career of Senator Jim Bunning and take time to thank him for his extraordinary service to our state and nation.”

Bunning’s continued presence in the race froze some Republican activists who were reluctant to abandon him, even as pressure mounted on Bunning to retire. But in recent weeks, signs appeared they were increasingly anxious for Bunning to make a decision. Several prominent Republicans – some of whom were long associated with Bunning – showed up on Grayson’s fundraising report.

Barren County Chairwoman Golda Walbert, a friend of Bunning’s and his wife, Mary, hadn’t abandoned him, but she’ll likely now support Grayson.

“I have a strong sense of loyalty and I would’ve held onto it for Jim,” she said when she heard the news Monday. “Ever since I’ve known Jim Bunning, I’ve considered him and Mary two of my best friends. But now that Bunning is no longer in the race, Trey is in a good position for the party to move in and continue to support him.”

Bunning made clear he thinks his decision was forced on him.

“Over the past year, some of the leaders of the Republican Party in the Senate have done everything in their power to dry up my fundraising,” Bunning said. He didn’t single out any leader by name.

But Bunning has had a tenuous relationship with seat mate and Republican Leader Mitch McConnell over the past six months, criticizing him and Texas Sen. John Cornyn who heads the National Republican Senatorial Committee, for hampering his fundraising.

McConnell issued a statement praising Bunning, a member of the Major League Baseball Hall of Fame..

“Jim has enjoyed two Hall of Fame worthy careers, and I am honored to have worked by his side in the Senate for the past several years,” McConnell said. He said Bunning’s “steadfast focus on serving the people of the commonwealth has been as unwavering as his conservative ideals.”

McConnell critic and Bunning supporter Larry Forgy, the1995 Republican candidate for governor, said McConnell’s statement was “hypocritical and false.”

“He’s been standing on Bunning’s fundraising hose for months,” Forgy said, saying McConnell treats friends like “Pampers – they’re disposable.”

Bunning raised only $300,000 in the second quarter, after raising $263,000 in the first three months while Grayson raised $600,000 in less than two months. Two of the three Democrats in the race also raised more money than Bunning. Attorney General Jack Conway raised $1.325 million in the second quarter and Lt. Gov. Daniel Mongiardo raised more than $700,000 in the first six months. Paul raised $100,000 online and the third Democrat, Darlene Fitzgerald Price, raised about $15,000.

Conway and Mongiardo also both issued statements on Bunning’s announcement.

“Jim Bunning should be thanked for his many years of service in the public arena,” Conway’s said. “I wish him and his family well in the next chapter of their lives. As for the political race in 2010, I look forward to facing whomever the Republican nominee will be next fall.”

Mongiardo – who made a name for himself by narrowly losing an underfunded campaign against Bunning in 2004 – said his current campaign was not about Bunning.

“It’s about fighting for affordable health care, affordable energy, and good jobs for Kentucky’s hard-working families.” Mongiardo said.

Bunning said he will continue voting his conservative principles during the remainder of his term and won’t endorse a Republican candidate in a primary.

“While I am confident this seat in the U.S. Senate will stay in Republican hands, I have no plans to endorse a candidate in the Republican primary,” Bunning said.

Ronnie Ellis writes for CNHI News Service and is based in Frankfort, Ky. He may be contacted by email at rellis@cnhi.com.