The prime minister, 52, announced his decision on national television after just a year in power, but did not specify a date for his resignation.
He said a change of leadership was needed to garner public support for government policies, and to push forward with Japan's involvement in counterterrorism efforts.
Japanese TV channel NHK quoted a government official as saying Abe had decided to step down because Ichiro Ozawa, the leader of the opposition Democratic Party, had refused to meet with him to discuss extending the antiterrorism law, set to expire on November 1.
The Democratic Party has pledged to vote against Japan's continued support for the United States-led coalition in war-torn Afghanistan.
Japanese refueling supply ships and Maritime Self Defense Force destroyers have been based in the Indian Ocean since November 2001 to support coalition efforts in Afghanistan, following the signing of the antiterrorism law in 2001, which has been repeatedly extended.
On July 29, the ruling coalition led by the Liberal Democratic Party lost its majority in the upper house of parliament, following a major public scandal in which millions of pension records were lost.
In March 2007 Shinzo Abe, widely considered a nationalist, sparked controversy in Asia and the West by playing down Japanese war crimes in WWII, and claiming there was no evidence that Japan's army abducted around 200,000 young women during the war from Korea, China, and other occupied territories, for use as sex slaves.