Obama has accused McCain and the Republican National Committee of being funded by lobbyists and special interest groups.
He has also vastly outraised his Republican rival, largely through funds raised in internet campaigns, and will most likely hold the advantage financially even if McCain accepts public money.
The public finance system is funded by $3 contributions that taxpayers can make to the presidential fund in their tax returns.
Obama said in a video statement emailed to journalists that it was "not an easy decision" to forego the money but he was keen for his supporters to "join us in building a new kind of politics".
"The public financing of presidential elections as it exists today is broken and we face opponents who've become masters at gaming this broken system," he said.
Obama has broken records for presidential campaign fundraising, raising more than $265 million as of the end of April, of which almost $10 million was for the general election.
McCain, on the other hand had raised nearly $115 million by the end of May. However he also has access to Republican National Committee's funds, which are considerably higher than those of the Democratic National Committee.
McCain's campaign dismissed Obama's announcement in a statement, saying Obama had "revealed himself to be just another typical politician who will do and say whatever is most expedient for Barack Obama".
"This decision will have far-reaching and extraordinary consequences that will weaken and undermine the public financing system," the campaign said.