Prime Minister designate Ahn Dae-hee withdrew himself from nomination on Thursday afternoon amid spiraling controversy over his high income and accusations that he received special favors.
"It would be a burden to the government if I stay as a prime minister nominee," Ahn said at a news conference.
"I apologise to the president for causing concern."
The resignation came six days after President Park Geun-hye nominated Ahn, a former star prosecutor, for the country's No. 2 post. Park's choice was seen as a fresh start for her government amid growing public criticism for its failure during the ferry disaster.
Presidential spokesman Min Kyung-wook told reporters that President Park "looked disappointed"when she was briefed on his decision ahead of the announcement.
Ahn's resignation is likely to deal a serious blow to Park's reform efforts and her reshuffle plan.
The president said she would carry out a major Cabinet reshuffle soon. She also proposed to conduct a major restructuring in her government to improve the country's safety standards and work efficiency.
President Park's nomination of Ahn Dae-hee as new prime minister was widely seen as a safe choice as he has been hailed as a "people's prosecutor."
As a prosecutor, Ahn led investigations into high-profile corruption cases involving politicians and presidential aides in 2003. He was a Supreme Court judge nominated by the then liberal-President Roh Moo-hyun and was endorsed by the parliament when then Uri Party, predecessor of the New Political Alliance for Democracy, had a majority of seats.
But less than a week after Ahn was nominated, expectations of the former corruption buster were shattered by a series of allegations.