Vaughan announced this shocking decision in the news conference. The 33-year-old batsman will be taking a three week break from all cricket and will play no part in the forthcoming fourth and final Test of the ensuing series at the Brit Oval starting on Wednesday.
The England selectors are on Monday set to name Vaughan"s successor along with the squad for the fourth Test at Lord"s.
Vaughan said: "After much careful consideration I have decided to step down as England Test captain effective immediately."
"I have made this decision with an enormous amount of pride and without any external pressure."
"This decision has been something that has crossed my mind for some time. I had every ambition to lead the England team to the next Ashes Series but as England captain I feel I"ve run out of steam."
"I believe that the best thing for the team is to embark on a new direction under a new captain. I also believe the best thing for me is to try and get back to being best batsmen I can be."
"I"ll still have all the experience and knowledge to pass on and I hope to be a valuable player for both my county and the England team."
"I"d like to take this opportunity to thank all the fans who have always been so supportive and have provided a huge inspiration to me as captain.
“A captain is only as good as his teams and I"ve been fortunate enough to captain some terrific players and great blokes."
Hugh Morris, managing director of England cricket, said: “On behalf of the ECB and everyone involved in cricket I"d like to thank Michael Vaughan for his contribution to the game.
“As England"s most successful captain he has always led from the front and always led with an unprecedented level of professionalism, integrity and honesty every step of the way.
“As a batsmen he has been one of the finest cricketers this country has seen and he took the England captaincy to new heights since assuming the role in 2003.
“Michael has been the best possible ambassador for the game and his record as captain speaks volumes for the type of character he has instilled in the England dressing room over the past six years.
“As a leader he has proved to be a team player in every sense of the word with a ruthless edge that has led to England"s resurgence as a cricketing force in recent years.
“His legacy within the game will be felt for many years to come and his captaincy will be missed by all who have played against or alongside him."
Vaughan led his team to a record 26 victories in 51 Tests and was at the helm for the unforgettable 2005 Ashes series when England beat Australia for the first time in 18 years.