"I have decided to withdraw from active politics and will not run as a candidate for Croatian president [in elections due later this year]" he announced on Wednesday.
Sanader is expected to recommend Jadranka Kosor, his deputy, as a replacement, state radio reported.
Croatian media has not yet reported a reason for Sanader's decision, but he faced growing economic troubles, with the country's GDP falling 6.7 per cent in the first quarter - the biggest drop in 10 years.
The conservative leader has led the government since 2003, winning a second term in November 2007.