The 85-year-old announced his decision during an address, in Latin, at the "Concistory for the canonization of the martyrs of Otranto", a small event held early in the morning.
The decision, which took even the Vatican hierarchy by surprise, makes him the first pope to resign since the Middle Ages.
His statement was posted on the Vatican Radio website.
Carrying out the duties of being pope required "both strength of mind and body," it said.
NBC New Vatican analyst George Weigel gives his thoughts on Pope Benedict XVI's announcement of his resignation, and explains how a new pope will be selected.
"After having repeatedly examined my conscience before God, I have come to the certainty that my strengths, due to an advanced age, are no longer suited to an adequate exercise of the Petrine ministry," the pontiff's statement said.
The choice was a "decision of great importance" for the church, the statement added. There are several papal contenders in the wings, but no obvious front-runner, The Associated Press reported.
Contenders to be his successor include Cardinal Angelo Scola, archbishop of Milan, Cardinal Christoph Schoenborn, the archbishop of Vienna, and Cardinal Marc Ouellet, the Canadian head of the Vatican's office for bishops.
His tough stance on theological issues had earned him the nickname "God's rottweiler." He was the oldest pope elected in nearly 300 years, according to The Associated Press.
The last pope to step aside was Gregory XII in 1415, who did so in order to end the Great Western Schism. The last papal abdication was in Celestine V in 1294.
Greg Burke, senior communications adviser to the Holy See, confirmed the pope will step down on February 28 at 8 p.m. local time (2 p.m. ET), leaving the office vacant until a successor is chosen.