He told supporters by email on Tuesday, "I've decided not to run. I realize that I would rather be a good husband and a good father than a good Washington politician".
Kennedy is the youngest son of the late U.S. Senator Robert Kennedy and he is the president of Chicago's Merchandise Mart.
His decision means a Democratic primary is shaping up between Illinois State Treasurer Alexi Giannoulias and Chicago Urban League head Cheryle Jackson.
Congressman Mark Kirk is running on the Republican side.