Theresa May and Andrea Leadsom will battle it out to become the next Conservative leader and first woman Prime Minister for 26 years.
It comes after the second round of voting among Tory MPs saw Home Secretary Mrs May pick up 199 votes, with Energy Minister Mrs Leadsom receiving 84.
Justice Secretary Mr Gove was eliminated from the contest after he only managed the support of 46 MPs.
Pro-EU Mrs May and pro-Brexit Mrs Leadsom will now go head-to-head in a ballot of around 125,000 Conservative members across the country in the next few weeks.
It means that by 9 September, Britain will have its first female PM since Margaret Thatcher, who left No 10 in 1990.
It is clear Mrs May has a big advantage among Tories at Westminster and has more ministerial experience than her rival.
But it is thought 60% of the party membership voted to leave the European Union last month.
Mrs Leadsom played a high-profile role in the campaign for Britain to quit the EU.
And she is likely to attract votes from eurosceptic activists who want a "Brexit Prime Minister" to oversee withdrawal negotiations with EU chiefs.
Sky's Senior Political Correspondent Beth Rigby said: "Andrea Leadsom is extremely popular among grassroots.
"They tend to be Brexiteers, they tend to be more right wing.
"There are certain issues that will go down well with them that she has voted on, for example abstaining on gay marriage.
"Theresa May got 60% of support from MPs so we know among the parliamentary party that she is the favourite.
"But there is a fear among Mrs May's supporters and her camp that among the grassroots it could be Andrea Leadsom that begins to take the lead."
Although Mrs May signed up to the Remain side, she maintained a low profile during the referendum campaign.
And she tried to neutralise the issue as she launched her leadership bid by saying she would not seek to overturn the result, declaring: "Brexit is Brexit."
Mrs May will also know that in both previous Tory ballots under the current system, grassroots Conservatives rejected the MPs' choice.
During those ballots in 2001 and 2005, members opted for Iain Duncan Smith and David Cameron over Ken Clarke and David Davis.
After winning the most votes from parliamentary colleagues, Mrs May said the UK needs "strong, proven" leadership to handle Brexit negotiations and unite the country.
She said: "I am delighted to have won so much support from my colleagues.
"This vote shows that the Conservative Party can come together - and under my leadership it will.
"We need strong, proven leadership to negotiate the best deal for Britain as we leave the European Union, to unite our party and our country, and to make Britain a country that works not for a privileged few but for every one of us."
Mr Gove said: "I'm naturally disappointed that I haven't been able to make it through to the final round of this leadership contest."
But he added: "Whoever the next Prime Minister of this country will be, it will be a female Prime Minister and a female Prime Minister who has formidable skills and I know whichever one of the two wins they will lead this country well."
Anti-EU campaigner and ex-London mayor Boris Johnson, who is backing Mrs Leadsom, said: "She is now well placed to win and replace the absurd gloom in some quarters with a positive, confident and optimistic approach, not just to Europe, but to government all round."
Earlier in the day, Mrs Leadsom pitched herself as the "prosperity not austerity" candidate.
She told her supporters she was the voice of optimism and would "banish pessimism" in the wake of the Brexit vote.
She also promised to listen to the thousands of people who felt they had been ignored by the country's leadership.
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