Palin said she wanted to effect a "positive change outside government", but did not say anything else about her future.
"I cannot stand here as your governor and allow the millions of dollars and all that time go to waste just so I can hold the title of governor,'' she said at a press conference outside her home in Wasilla.
'No interruptions'
A statement released earlier in the day by Palin's office said that her decision was taken in the best interests of the Republican party.
"With that in mind, my family and I determined that it is best to make a difference this summer, and I am willing to change things, so that this administration, with its positive agenda, its accomplishments, and its successful road to an incredible future, can continue without interruption and with great administrative and legislative success."
Lieutenant Governor Sean Parnell will be inaugurated at the end of the month, Dave Murrow, a spokesman for Palin, said.
Palin's announcement has prompted speculation as to whether she will now make an effort to run for the US presidency in 2012.
She was the running-mate to John McCain, the Republican challenger to Barack Obama, a Democrat, in the 2008 presidential race.
Her term as governor of Alaska was due to end in 2010 but her popularity in the state has waned since the Republicans lost to Obama.