Lawrence Summers, who was considered the leading candidate to replace current US Federal Reserve Chairman Ben Bernanke, has withdrawn his name from consideration, according to the White House.
The surprise news comes just before the US central bank meets on Tuesday and Wednesday to decide when and by how much to scale back its monthly asset purchases from the current pace of $85bn.
In a statement on Sunday, President Barack Obama said he had accepted Summers' decision.
"Larry was a critical member of my team as we faced down the worst economic crisis since the Great Depression, and it was in no small part because of his expertise, wisdom and leadership that we wrestled the economy back to growth and made the kind of progress we are seeing today," Obama said.
Summers' decision could make Janet Yellen the leading candidate to replace Bernanke.
Yellen, who became a member of the Fed's board of governors in 1994 and is the current vice chairwoman, would be the first woman to run the Fed.
The US dollar slid while bonds and shares rallied in Asia on Monday after the news broke. Investors wagered that Fed policy would stay easier for longer under Yellen.
Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale it back quicker than Yellen.
As director of the National Economic Council, Summers oversaw the administration's response to the economic and financial crisis early in Obama's first term.
However, Summers faced opposition from some Democrats, including members of the Senate Banking Committee.
Summers alluded to the opposition to his candidacy in a letter he sent to Obama on Sunday to formally withdraw from consideration.
"I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the administration or ultimately, the interests of the nation's ongoing economic recovery," he wrote.
Summers' ascent to the top of the list to succeed Bernanke angered some of the president's leftwing supporters.
He was seen as having been too cosy with Wall Street and was criticised for controversial comments he made about women and math and science that contributed to Summers forced resignation as Harvard's president in 2006.
Shaunna Thomas, co-founder of the women's rights group UltraViolet, welcomed Summers' withdrawal, saying she hopes it serves as "a reminder to all that sexism has no place anywhere in society and certainly not in the highest levels of our government".
Thomas called on Obama to nominate Allen.
Obama vigorously defended Summers in recent weeks, both in public comments and in closed-door meetings with legislators.
"I will always be grateful to Larry for his tireless work and service on behalf of his country, and I look forward to continuing to seek his guidance and counsel in the future," Obama said.
He is expected to announce his nomination as early as this month. Bernanke's term ends on January 31, 2014.