Paterno said he was "absolutely devastated" by the case, in which his onetime heir apparent, Jerry Sandusky, has been charged with molesting eight boys in 15 years, including at the Penn State football complex.
He said he hoped the team could finish its season with "dignity and determination."
The school's board of trustees could still force Paterno to leave immediately. It also could take action against the university president, Graham Spanier.
Paterno said the trustees, who had been considering his fate, should "not spend a single minute discussing my status" and have more important matters to address.
The 84-year-old Paterno has been engulfed by outrage that he did not take more action after a graduate assistant, Mike McQueary, came to him in 2002 and reported seeing Sandusky in the Penn State showers with a 10-year-old boy. Paterno notified the athletic director, Tim Curley, and a vice president, Gary Schultz.
Curley and Schultz have since been charged with failing to report the incident to the authorities. Paterno hasn't been accused of legal wrongdoing. But he has been assailed, in what the state police commissioner called a lapse of "moral responsibility," for not doing more to stop Sandusky.
"This is a tragedy," Paterno said in a statement. "It is one of the great sorrows of my life. With the benefit of hindsight, I wish I had done more."
Paterno met with his coaching staff and players in the football building at Penn State for about 10-15 minutes Wednesday in what was described as a very emotional session. Standing at a podium, Paterno told them he was leaving and broke down in tears.
"I never thought I'd hear those words coming from Joe Paterno's mouth. He's been here so long," junior fullback Michael Zordich said.
Players gave him a standing ovation when he walked out.
"In all the clips I've seen of him, I've never seen him break down and cry. And he was crying the whole time today," quarterback Paul Jones said. "He said it's the best decision."
Cornerback Stephon Morris said some players also were nearly in tears while Paterno spoke.
"I still can't believe it," Morris said. "I've never seen Coach Paterno like that in my life."
Asked what was the main message of Paterno's talk, Morris said: "Beat Nebraska."
The decision to retire by the man affectionately known as "Joe Pa" brings to an end one of the most storied coaching careers, not just in college football but in all of sports. Paterno won 409 games, a record for major college football, and is in the middle of his 46th year as coach.
Patrolling the sideline -- thick-rimmed glasses and windbreaker, tie and khaki pants -- Paterno was as unmistakable as the school's classic blue and white uniforms. Happy Valley was, indeed, a place where no one came close to Paterno's stature.
"I think it's the right thing," freshman Jake Schur said. "He didn't do what he should have. He's doing the right thing by stepping down to preserve the Penn State football program.
"It's sad to see it happen under such a bad situation but at the same time everyone was sort of preparing themselves for it."
The retirement announcement came three days before Penn State hosts Nebraska in its final home game of the season, a day set aside to honor seniors on the team.
Penn State has bounced back from a mediocre 2010 season to go 8-1 this year, with its only loss to powerhouse Alabama. The Nittany Lions are No. 12 in the AP college football poll.
After 19th-ranked Nebraska, Penn State plays at Ohio State and at No. 16 Wisconsin, both Big Ten rivals. It has a chance to play in the Big Ten championship game Dec. 3, with a Rose Bowl bid on the line.
In the statement, Paterno said: "I grieve for the children and their families, and I pray for their comfort and relief."
He went on: "I have come to work every day for the last 61 years with one clear goal in mind: To serve the best interests of this university and the young men who have been entrusted to my care. I have the same goal today."
A day earlier, Paterno had showed up for practice and adoring crowds rallied outside his modest home into the night, chanting his name.
But Paterno, whose football program bore the motto "Success with Honor," could not withstand the backlash from a scandal that goes well beyond the everyday stories of corruption in college sports.
"If this is true, we were all fooled, along with scores of professionals trained in such things, and we grieve for the victims and their families," Paterno said in a statement Sunday. "They are in our prayers."
Sandusky, who retired from Penn State in June 1999, maintained his innocence through his lawyer.
Paterno has defended his decision to take the news to Curley and Schultz. Paterno said it was obvious that the graduate student, since identified as McQueary, was "distraught," but said he was not told about the "very specific actions" of the sexual assault in the grand jury report.
After Paterno reported the incident to Curley, Sandusky was told to stay away from the school. But critics say Paterno should have done more.
"When an institution discovers abuse of a kid, their first reaction was to protect the reputation of the institution and the perpetrator," John Salveson, former president of the Pennsylvania chapter of the Survivors Network of those Abused by Priests, said this week.
Sandusky founded The Second Mile charity in 1977, working with at-risk youths. It now raises and spends several million dollars each year for its programs. Paterno is listed on The Second Mile's website as a member of its honorary board of directors, a group that includes business executives, golfing great Arnold Palmer and several NFL Hall of Famers and coaches, including retired Pittsburgh Steelers stars Jack Ham and Franco Harris.
Paterno's requirement that his players not just achieve success but adhere to a moral code that they win with honor transcended his sport. Duke basketball coach Mike Krzyzewski said in June for an ESPN special on Paterno: "Values are never compromised. That's the bottom line."
His sudden departure leaves his fans and detractors wondering who exactly was the real "Joe Pa."
Was he the gentle once-in-a-lifetime leader with a knack for molding champions? Or simply another gridiron pragmatist, a detached football CEO, his sense of right and wrong diluted by decades of coddling from "yes" men paid to make his problems disappear.
History will decide whether the enduring image will be that of Paterno surrounded by all those reporters as he hurried to practice this week, or his signature look on the sidelines: Rolled-up khakis. Jet-black sneakers. Smoky, thick glasses. That famous Brooklyn accent that came off only as whiny as he wanted it to be.
"Deep down, I feel I've had an impact. I don't feel I've wasted my career," Paterno once said. "If I did, I would have gotten out a long time ago."
Paterno turned Penn State into one of the game's best-known programs and the standard-bearer for college football success in the East.
National titles in 1982 and 1986 -- under defenses run by Sandusky -- cemented him as one of the game's greats. In all, Paterno guided five teams to unbeaten, untied seasons, and he reached 300 wins faster than any other coach.
A year after he took over at sleepy Penn State in 1966, Paterno began a 30-0-1 streak fueled by players such as Jack Ham and Dennis Onkotz.
But the Nittany Lions fell short in the polls, finishing No. 2 in 1968 and 1969 despite 11-0 records, and No. 5 in 1973 despite a 12-0 record.
In 1969, Texas edged out Penn State for the title with help from an unlikely source: President Richard Nixon declared the Longhorns No. 1 after their bowl game.
"I'd like to know," Paterno later said, "how could the president know so little about Watergate in 1973, and so much about college football in 1969?"
Elite status finally arrived in the 1980s. The Nittany Lions claimed national titles in 1982, with a 27-23 win over Georgia at the Sugar Bowl, and in 1986, intercepting Miami's Vinny Testaverde five times in a 14-10 win at the Fiesta Bowl.
They have made several title runs since then, including the 2005 run to the Orange Bowl and an 11-1 regular-season campaign in 2008 that ended with a trip to the Rose Bowl and a 37-23 loss to Southern California.
"He will go down as the greatest football coach in the history of the game. Every young coach, in my opinion, can take a lesson from him," former Florida coach Urban Meyer said after his last game with the Gators, a 37-24 win over Penn State at the 2011 Outback Bowl. Now Meyer's name will be among those raised as a possible successor.
Paterno's longevity became all the more remarkable as college football transformed into a big-money business.
The school estimated there have been at least 888 head coaching changes at FBS schools since Paterno took the job. He is the all-time leader in bowl appearances (37) and wins (24). And he sent more than 250 players to the NFL.
On Oct. 29, Penn State beat Illinois 10-7, earning Paterno win No. 409, breaking a tie with Grambling State's Eddie Robinson for most in Division I.
All he wanted to do, he had said two days earlier, was "hopefully have a little luck and have a little fun doing it. I've been lucky enough to be around some great athletes."
He said the success came because "the good Lord kept me healthy, not because I'm better than anybody else. It's because I've been around a lot longer than anybody else."
So long, in fact, that it seemed there was no getting rid of him, even as age and injuries crept up and his famous resistance to modern technology turned him into a dinosaur.
But just as much, it was a string of mediocre seasons in the early 2000s that had fans wondering whether it was finally time for Paterno to step aside.
Paterno's salary was about $1 million annually, and some questioned how much actual work he did in his later years. He always praised his veteran assistants.
"I'm not where I want to be, the blazing speed I used to have," he said in October, poking fun at himself. "It's been tough. ... it's a pain in the neck, let me put it that way."
Paterno cut back on road trips to see recruits. He ended his annual summer caravan across Pennsylvania to meet alumni and donors.
He often said he never read the newspaper -- though the critical comments got back to him somehow. Some suspected his wife, Sue, kept him abreast of the news.
"You guys write stories about how I sit around and don't do anything," Paterno said after watching his 409th victory from the Beaver Stadium press box. "I just hope we can help the team do the things that they want to do."
How much longer he was going to coach was -- until this week -- the biggest question to dog him.
"Who knows?" Paterno said with a straight face in October. "Maybe I'll go 10 years."
The terms of his departure conflict significantly with the reputation he built in nearly a half-century of turning a quaint program into a powerhouse with instant name recognition.
He made it to the big time without losing a sense of where he was -- State College, population 42,000, a picturesque college town smack-dab in the middle of Pennsylvania.
Paterno and his wife raised five children in State College. Anybody could ring up his ranch home using the number listed in the phone book under "Paterno, Joseph V." Anybody could walk up to offer good luck as he walked to home games.
For the most part, Paterno shunned the spotlight, though he had a knack for making a joke that could instantly light up a room.
"You guys have to talk about something. The fans have to put something on those -- what do you guys call those things, twittle-do, twittle-dee?" Paterno cracked at one Big Ten media day.
He was referring, of course, to the social media site Twitter.
Paterno had no qualms mocking himself or the media, with which he could be abrasive at times. Stubborn to a fault, Paterno also had disputes with his bosses, as might be expected for someone who has spent decades with the same employer.
As his reputation grew, so did the spotlight on his on-field decisions and program as a whole.
In 2002, following some run-ins with officials over controversial calls, an effigy of a football official, yellow flag in hand, was seen hanging on the front door of Paterno's home. Though he never said how the doll got on the door, Paterno hinted his wife might be responsible and it was all done in fun.
After he started the 21st century with four losing seasons in five years, Paterno faced growing calls for his dismissal -- once considered heresy in Happy Valley -- in the 2004 season.
The next year, Penn State went 11-1 and won the Big Ten. The Nittany Lions capped the campaign with a thrilling 26-23 win in triple overtime at the Orange Bowl against Florida State and Paterno's longtime friend, coach Bobby Bowden.
Bowden left the Seminoles following the 2009 season after 34 years, finishing with 389 wins. Asked whether any contemporary coach would stick around as he and Paterno had, Bowden said: "Not likely. It doesn't seem to be the style nowadays."
A 1950 graduate of Brown University, Paterno said his father, Angelo, hoped his son would someday become president. Paterno himself planned to go to law school.
A quarterback and cornerback at Brown, Paterno set a defensive record with 14 career interceptions -- a distinction he sometimes boasted about to his team.
Law school never materialized. At 23, he was coaxed by Rip Engle, his former coach at Brown, to work with him when Engle moved to Penn State in 1950.
"I had no intention to coach when I got out of Brown," Paterno said in a 2007 interview before being inducted into the Hall of Fame. "Come to this hick town? From Brooklyn?"
Paterno turned down an offer from the late Al Davis to be offensive coordinator for the Oakland Raiders in 1963.
Three years later, Paterno became Penn State's head coach after Engle retired.
The New England Patriots offered Paterno the head-coaching job in the early 1970s, only to be rebuffed.
Engle never had a losing season at Penn State, but when Paterno took over, the Lions still were considered inferior "Eastern football."
As the program turned into something much bigger, Paterno's fans always insisted it was more than simply about winning.
"He teaches us about really just growing up and being a man," former linebacker Paul Posluszny, now with the NFL's Jacksonville Jaguars, once said. "Besides the football, he's preparing us to be good men in life."
As of 2011, Penn State has had 49 academic All-Americans -- 47 under Paterno -- the third-highest total among FBS institutions. The team's graduation rates consistently ranked among the best in the Big Ten. In 2010, Penn State's 84 percent rate trailed only Northwestern's 95, according to the NCAA.