Blatter said that he will call for "an extraordinary congress" that will be held "as soon as possible" to elect a new president.
Blatter will stay on as president until his successor is elected.
Last month, U.S. authorities indicted a group of senior FIFA officials on corruption charges. Media reports on Monday said Blatter's top lieutenant, secretary general Jerome Valcke, had transferred $10 million to an account controlled by former CONCACAF President Jack Warner. That payment was allegedly part of a bribe to help South Africa secure the right to host the 2010 World Cup.
Neither Valcke nor Blatter has been formally accused of wrongdoing, but the development brought the investigation very close to FIFA's top leadership.
Blatter said that even though members of FIFA gave him a new mandate through his re-election last week, he did not feel that vote was enough for "the fans, the players, the clubs, the people who live, breathe and love football as much as we all do at FIFA."
"That election is over but FIFA's challenges are not," Blatter said. "FIFA needs a profound overhaul."
Blatter added that he asked Domenico Scala, the independent chairman of audit and compliance at FIFA, to oversee the election of his replacement.
Scala called Blatter's decision to resign "difficult and courageous." Scala said he would also work to begin reforming the organization.
"While it would be premature to speculate on the outcomes of this work, nothing will be off the table, including the structure and composition of the executive committee and the way in which members of the executive committee are elected," Scala said. "I expect this to be an important aspect of ongoing reform."
He said FIFA statutes require a four-month window before holding presidential elections, so he expects they could take place anytime from December to March.