Chappell, the former Australian captain, sent an e-mail to the Board of Control for Cricket in India (BCCI) on Wednesday saying he did not want to seek an extension due to "family and personal" reasons.
The decision came ahead of crucial BCCI meetings here on Friday and Saturday to take stock of India's dismal World Cup performance where they were knocked out of the first round.
Just last week, Chappell had told confidants he would not resign and was keen to renew his two-year contract as coach that ended with the World Cup.
BCCI insiders say Chappell changed his mind after growing media speculation that he had fallen out with senior players, whom he is reported to have described as "a mafia" in one newspaper report.
Chappell distanced himself from the snowballing controversy, saying he will not speak till he had submitted his report to the BCCI on Friday.
The link finally snapped when senior pro Sachin Tendulkar responded to media reports that Chappell had blamed the unhelpful attitude of senior players for the disastrous World Cup campaign.
In a rare public outburst, the normally reticent Tendulkar said he would be hurt if Chappell had questioned his or the team's commitment.
"No coach had mentioned even in passing that my attitude was not correct," said Tendulkar, statistically the most successful batsman ever with a world record 35 Test and 41 one-day centuries
"It's not that we are defending ourselves. We do realise that we played badly and, as a team, we take full responsibility for that. But what hurt us most is if the coach has questioned our attitude."
Former India players and television experts, Ajay Jadeja and Arun Lal, were convinced Chappell's days were numbered ever since the World Cup ended.
"If Tendulkar was forced to speak, things must have been really bad between Chappell and the senior players," said Jadeja.
"I will believe Tendulkar more than Chappell. And the BCCI also would rather stick with the players."
Lal said he had also not expected Chappell to continue.
"His mandate was to make a team for the World Cup. Maybe two years was not enough, but no one also expected such a poor performance," he said.
Under Chappell, India won 32 of their 62 one-day internationals and seven of 18 Tests. But the team faltered when it mattered most.
India, one of the pre-tournament favourites, were upset by Bangladesh in the first match and also lost to Sri Lanka to record their worst World Cup performance since 1979.
Chappell will get his chance to apprise the BCCI of what went wrong in the Caribbean - including his assessment of all players - at the brainstorming session here on Friday.
The outspoken Australian batting great generated more heat, controversy and headlines in two years as India's coach than his genial predecessor John Wright did in five years on the job.
Chappell became the media's whipping boy early in his tenure when criticism of Sourav Ganguly's laid-back attitude saw the country's most successful captain being thrown out of the team.
Chappell's displeasure at the exclusion of juniors like Suresh Raina for the World Cup, as revealed in a text message to a journalist, raised the heckles of both the selectors and senior players.
"If Greg had his way, even Sachin Tendulkar would have been dropped," the Kolkata-based Telegraph newspaper quoted an unnamed selector as saying.
Influential cricket officials believe the team has not moved forward in the two years that Chappell has been coach. Many say the 2003 World Cup finalists have fallen behind other teams.
India must find Chappell's replacement quickly since they are due to tour Bangladesh in May for two Tests and three one-day internationals.