"His mandate ends at the end of the month. He has no plans of continuing," his office said on Friday.
The former president of the World Bank had been serving as an envoy to the Quartet group of the international mediators to the region - the UN, US, EU and Russia.
During his term, Wolfensohn had concentrated on plans to assist Palestinian rebuilding of the Gaza Strip, following Israel's withdrawal last year.
He helped negotiate agreements between Israel and the Palestinians on border control as well as the flow of goods in and out of Gaza.
Wolfensohn also raised funds for the purchase of greenhouses from Israeli settlers that were to be used by Palestinians.
However, negotiations hit repeated obstacles and the agreements in some cases were not honoured.
Diplomats said he had decided not to continue as envoy following the establishment of the new Hamas-led Palestinian government.
The Quartet has repeatedly called on Hamas to recognise Israel, renounce violence and honour previous agreements made by the Palestinians. Hamas has rejected their demands.
In November last year, he said he was thinking of stepping down as he was frustrated by the inability of Israelis and Palestinians to work together.
The envoy also last year accepted a senior advisory position at US financial corporation, Citigroup.