"It hurts to make this choice but I'm doing what's best for Alaska," she said in a speech from the backyard of her home in Wasilla, with her husband Todd and children, Piper, Bristol and Willow, at her side. "You can effect change from the outside, and I can too."
She also said that her year-old son Trig, who has Down syndrome, needs her at home more.
Palin, 45, came out of nowhere last summer when she was picked by Republican presidential nominee John McCain as his running mate.
U.S. Senate?Lampooned by critics and on Saturday Night Live, Palin recently tangled with David Letterman after he made off-color jokes about her trip to New York with her 14-year-old daughter Willow.
Lt. Gov. Sean Parnell will take over as governor of Alaska, which elected Palin as its first female governor in 2006.
"We know we can effect positive change outside government," Palin said. "I know the time when its time to pass the ball for victory. Trust me with this decision."
Even before her announcement, Palin was rumored to be mulling a bid for the White House in 2012, and pundits have speculated about a campaign for U.S. Senate. One of Alaska's Senate seats comes up for grabs in 2010.
"This comes as no surprise," says UC Santa Cruz professor Geoffrey Dunn, a political analyst who is writing a book about Palin, due out later this year. "Palin clearly was detached and ineffective as governor since the 2008 presidential campaign. The day-to-day challenges of running a state simply did not mesh with her skill set or her personality. More importantly, she couldn't run for president from Wasilla."