Daley, 68, son of the late Chicago Mayor Richard J. Daley, was first elected in a special election in April 1989 after the death of Mayor Harold Washington. He said he would not be a candidate when his current term ends in 2011, the Chicago Tribune reported.
"The truth is I have been thinking about this for the past several months," Daley said at a City Hall news conference. "In the end this is a personal decision, no more, no less."
Daley's wife Margaret has waged a long fight with cancer. The couple have four children.
With his wife, son Patrick, daughters Elizabeth and Nora and son-in-law Sean Conroy looking on, Daley said: "In the coming days I know there will be some reflecting on my time as mayor. Many of you will search to find out what's behind my decision. It's simple.
"I have always believed that every person, especially public officials must understand when it is time to move on.
"For me that time is now."
Daley, who will become the longest-serving mayor of the nation's third-largest city on Dec. 26, has spent 38 years in public service as an Illinois state senator, Cook County state's attorney and mayor.
Daley's father died in office in 1976 after serving 21 years and eight months.
Saying he loved the city and could not have been mayor without the love and support of his family, Daley said of his decision "it just feels right."
Potential contenders include a host of Democrats in the 50-member Chicago City Council, Cook County Assessor Jim Houlihan, Cook County Sheriff Tom Dart and former Illinois Rep. Rahm Emanuel, currently President Barack Obama's White House chief of staff.
Obama, who got his start in politics in Illinois, praised Daley for his public service.
"No mayor in America has loved a city more or served a community with greater passion than Rich Daley," Obama said in a statement released by the White House. "He helped build Chicago's image as a world-class city, and leaves a legacy of progress that will be appreciated for generations to come."