Martin McGuinness, a prominent Sinn Fein member who became Paisley's deputy, praised his former antagonist for providing "decisive leadership that was instrumental in achieving the peace that we now enjoy".
Paisley, 81, said he has decided to leave after mounting pressure from within his party in recent weeks to stand aside.
He said he would step down after an investment conference in Belfast organised by the power-sharing executive.
"I came to this decision a few weeks ago when I was thinking very much about the conference and what was going to come after the conference," Paisley said.
"I thought that it is a marker, a very big marker and it would be a very appropriate time for me to bow out."
Although he will resign as first minister, he said he plans to remain a member of the British parliament and a Northern Ireland assembly member.
Gordon Brown, Britain's prime minister, said he admired the leadership Paisley had shown as first minister.
Brown said: "His commitment and dedication to public service deserve our gratitude. Progress on bringing a lasting peace to Northern Ireland would not have been possible without his immense courage and leadership."
Paisley ended three and a half years of political deadlock in March 2007 by abandoning his decades-old refusal to work with Sinn Fein following that party's landmark decision to begin working with Northern Ireland's police force.
Paisley and McGuinness consequently took charge of a 12-member, four-party administration.
Peter Hain, Britain's former Northern Ireland secretary, said: "He played an absolutely historic role in ending the deadlock and establishing permanent devolved government and deserves enormous credit for the courage and vision he showed."
Paisley's leadership was widely seen as having been undermined when his son, Ian Paisley Jr, who was forced to resign last month from the coalition amid allegations of ethical failures.
His son was the first minister to quit the nine-month-old administration.
Paisley had previously insisted he would serve his full term as power-sharing leader through to 2011, but he was facing growing disquiet from hard-liners over his decision to share power.
In January, he was forced to stand down as leader of the Free Presbyterian Church of Ulster, the anti-Catholic denomination he founded in 1951, amid grass roots disillusionment with his political U-turn.
Paisley founded the Democratic Unionists party in 1971 to oppose compromise with Catholics.
But his hold over the party was shaken in January when the Democratic Unionists lost a by-election for a vacant Northern Ireland assembly seat, in part because some Protestant voters turned to a fringe party opposed to power-sharing.