Daniels released an early morning email to his supporters indicating he would not sacrifice his family's privacy to run in the race for the GOP nomination.
"In the end, I was able to resolve every competing consideration but one," said the former Bush White House budget chief, disclosing his decision in a middle-of-the-night e-mail to supporters. "The interests and wishes of my family, is the most important consideration of all. If I have disappointed you, I will always be sorry."
Daniels' decision narrows the presidential hopeful field but makes a wide-open race even hazier.
A two-term Midwestern governor, Daniels had considered a bid for months and was pressured by many in the Republican establishment who longed for a conservative with a strong fiscal record to run.
He expressed interest in getting in the race partly because it would give him a national platform to ensure the country's fiscal health would remain part of the 2012 debate.
But Daniels always said his family -- his wife and four daughters -- was a sticking point.
Had he entered, Daniels would have shaken up an evolving field that lacks a front-runner against President Barack Obama and that has been unpredictable in its early stages.
Daniels had donors and grass-roots supporters at the ready for a national fundraising and political organization that some aides privately said would rival those of announced candidates.
Instead, Daniels becomes the latest Republican to opt against a bid as the GOP searches for a Republican to challenge Obama in 2012.
Daniels' close friend, Mississippi Gov. Haley Barbour, surprised much of the GOP when he pulled the plug on a candidacy in April, and. Barbour privately encouraged Daniels to run. A week ago, former Arkansas Gov. Mike Huckabee, the 2008 Iowa caucus winner, bowed out, followed quickly by celebrity real estate developer Donald Trump.
"I am disappointed. I think his candidacy would have been a great addition to this race," said Rep. Paul Ryan, R-Wis., the chairman of the House Budget Committee and, like Daniels, a proponent of bringing fiscal issues to the forefront of political debate.
"I think it's unfortunate that he's not going to run," Ryan said Sunday on NBC's "Meet the Press." The Wisconsin congressman waved off any suggestion he would enter the presidential race himself.
Polls show that Republican primary voters want more options in a race that includes former Govs. Mitt Romney of Massachusetts and Tim Pawlenty of Minnesota, as well as ex-House Speaker Newt Gingrich and others.
In the wake of the decisions by Barbour and Huckabee to skip the race, the clamoring among establishment Republicans for Daniels to run -- including from the Bush family circle -- had become ear-shattering.
"The counsel and encouragement I received from important citizens like you caused me to think very deeply about becoming a national candidate," Daniels said in the e-mail message.
"If you feel that this was a non-courageous or unpatriotic decision, I understand and will not attempt to persuade you otherwise," he added. "I only hope that you will accept my sincerity in the judgment I reached."
Daniel had sounded more optimistic about a run in the past week than he had in months, though he never had sounded particularly enthused. His advisers had reached out to Republicans in Iowa and other early nominating states for private conversations.
But as he talked about a candidacy, he always pointed back to his family as the primary issue that would hold him back.
Daniels' wife, Cheri, filed for divorce in 1993 and moved to California to remarry, leaving him to raise their four daughters in Indiana.
She later divorced and then remarried Daniels in 1997.
Mrs. Daniels had never taken much of a public role in her husband's political career. So it raised eyebrows when she was chosen as the keynote speaker at a major Indiana fundraiser earlier in May.
Both husband and wife were said to be pleased with the reception they got, and advisers suggested that the outcome could encourage Daniels to run for president. Even so, Republicans in Washington and Indiana with ties to Daniels put the odds at 50-50.
A former budget director under President George W. Bush, Daniels used his time considering a run to also shine a spotlight on rising budget deficits and national debt, even though his former boss grew the scope of government and federal spending during his tenure.
Daniels, a one-time senior executive at Eli Lilly & Co., caused a stir among cultural conservatives by saying the next president facing economic crisis "would have to call a truce on the so-called social issues."
He is looked with admiration in GOP circles for being the rare Republican who won office in a Democratic year -- 2008 -- in a state that Obama had won. And, since being re-elected, he has leveraged Republican majorities in the state Legislature to push through a conservative agenda.
Daniels made his intentions clear in a characteristically understated e-mail.
It was sent by the governor through Eric Holcomb, the Indiana Republican Party chairman and one of Daniels' closest advisers, and confirmed by others close to the governor on the condition of anonymity to avoid pre-empting his announcement.
It ended: "Many thanks for your help and input during this period of reflection. Please stay in touch if you see ways in which an obscure Midwestern governor might make a constructive contribution to the rebuilding of our economy and our Republic."
(The Associated Press contributed to this report.)