"We are withdrawing," Muhsin Abd al-Hamid, head of the Iraqi Islamic Party, said on Monday.
"We are not calling for a boycott but we said we would take part only if certain conditions had been met and they have not."
His party had threatened to boycott the election unless it was postponed by up to six months to ensure that voters across the country would be able to vote.
Violence in Sunni areas has raised fears that voters there would be too intimidated to cast their ballots.
The Iraqi Islamic Party had fielded a list of 275 candidates for the 30 January vote, which will choose a National Assembly to draft a constitution and appoint a government.
Going on to explain the decision to Aljazeera, Abd al-Hamid said: "We have not called for boycotting the elections," Abd al-Hamid said.
"We believe that free and fair elections are the solution to the problems of the Iraqi people.
"However, and according to our examination of the situations during the last two months and the security disorder increasing every day, we have found out that these elections cannot be properly and fairly carried out in the whole country.
"At least five to six governorates will not be included. Therefore, we have called to postpone the elections.
"However, our demands have not been met; and therefore, we had to withdraw.
"We are still determined to participate in any proper elections, in which all the Iraqi people participate.
"We do believe in the elections. They are necessary and are the only way for the Iraqi people to choose an elected legitimate Iraqi government and an elected parliament that can participate in negotiations with the occupation to set up an agenda for their withdrawal, establish the constitution and draw the future of the Iraqi people."
It was not clear if the party's name would appear on ballot papers.