Waheed, who was installed after an alleged coup ousted President Mohamed Nasheed in February 2012, took 5 percent of votes and came in last in the contest.
His decision not to remain in the race comes after the Supreme Court annulled the first round, held Sept. 7, which will be rerun Oct. 19.
Waheed took his decision in the "greater interest" of the Maldives, citing concerns about the integrity of the independent Elections Commission, Minivan News reported.
"The court found serious flaws with the election register and considered other allegations of irregularities," the President's Office said in a statement. "Disputes arising out of the first round have caused serious disagreements among the political parties, the Elections Commission and the Supreme Court. During the remaining time, the president will do his best to maintain peace and stability, to ensure the election process continues with greater fairness and to steer the country through these difficult times."
Waheed's decision makes way for a return of the Maldivian Democratic Party candidate Nasheed, who was elected 2008, ending 30 years of autocratic rule by Maumoon Abdul Gayoom.
In this month's annulled first round of voting, Nasheed won 45 percent of the vote.
Progressive Party of Maldives candidate Abdulla Yaameen came in second with 24 percent.
Qasim Ibrahim of the Jumhooree Party, who came in third, asked the court to annul the results of the election, alleging voter fraud.
Last week, the Supreme Court ruled in favor of Ibrahim.
International observers had praised the conduct of the first-round election but Nasheed's supporters condemned the Supreme Court's decision, the BBC reported.
After the Supreme Court decision, there were street protests as tensions rose in the Indian Ocean tourist mecca nation of around 1,200 islands -- 200 of which are inhabited.
The Maldives was a protectorate of the Dutch in the 17th century and then the British in the 19th century before gaining independence in 1965.
Last week the Police Integrity Commission launched an investigation into the failure of authorities to protect a TV station that supported Nasheed from an arson attack.
Security video cameras caught the masked men throwing fluid around computers and keyboards in a control room and then putting a light to the liquid, sending flames leaping throughout the building.
The owner of Raajje TV estimated damages were more than $1 million, Haveeru Online reported.
The United Kingdom remains one of the Maldives tourism industry's biggest markets.
The British government issued a travel warning last week, suggesting visitors "should take care, seek up to date information and keep away from any demonstrations."
U.K. Foreign Minister William Hague called on the government of the Maldives to respect the democratic process carry out a free and fair poll.
"It is imperative that there are no further delays and the elections be free, fair and inclusive and that international observers are invited," Hague said.