Obama budget chief Jack Lew will take over the job.In a letter to the president, Daley said he was honored to have been a part of the administration. But he said it's now time for him to return to the city he loves.
"I want to thank, once again, Bill for his extraordinary service, but also his extraordinary friendship and loyalty to me. It's meant a lot," said Pres. Obama.
With that, the President said farewell to Bill Daley after just one year as White House Chief of Staff. The stated reason for Daley's short tenure?
"In the end, the pull of the hometown we both love -- a city that's been synonymous with the Daley family for generations -- was too great. Bill told me that he wanted to spend more time with his family, especially his grandchildren, and he felt it was the right decision," said Obama.
Bill Daley has publicly bemoaned the partisan climate in Washington, even members of the president's own party.
But on Monday Mr. Obama credited him with steering through a deal on the debt ceiling and the departure of American forces in Iraq. And on his first official day on the job, he attended the first of many meetings that would lead to the death of Osama bin Laden.
While Bill Daley has a famous last name, he was a power player in his own right. He served as commerce secretary under Bill Clinton, stood with Al Gore during the 2000 election vote count and recount, then worked as a top executive at JP Morgan Chase.
Mr. Obama drafted Daley with the hope he would be a bridge to the business community and Republican members of Congress.
"The president was so surprised. He walks back in after his Hawaiian vacation and his top aide, his chief of staff walks in and hands him a one paragraph resignation letter saying it's time for me to go," said Ann Compton, ABC News White House correspondent.
Bill Daley's resignation letter was written January 3rd and states, "I have been honored to be a small part of your administration. It is time for me to go back to the city I love."
"He knows there's a battle in everything in politics, but it's become very ugly in the past couple of years since Clinton," said John Daley. "In December, I think he was ready to move on."
"I'm very proud of my brother's ongoing commitment to public service and to the people of this great country," said former Mayor Richard M. Daley. "It is an honor for him to have been asked by the Ppresident to serve in his administration, and Bill is grateful for the opportunity."
A statement from former chief of staff and current Mayor Rahm Emanuel says of Daley: "He had the president's back, every day. That is what you want from a White House chief of staff. Now, Bill can leave with his head held high and a job well done."
Bill Daley will come home to Chicago after the State of the Union and be one of several co-chairs of the president's re-election effort.
The Associated Press contributed to this report.