The 87-year-old Lee stepped down along with Goh Chok Tong, another past prime minister, a week after Singapore's ruling People's Action Party suffered a major setback in national elections.
Lee said in a written statement he was stepping down to give Prime Minister Lee Hsien Loong more flexibility to address voter concerns. "We want to make it clear that the PAP has never been averse to change," he said.
The Financial Times said Lee's resignation had not been expected and left Singaporeans facing a government without the man considered the founding father of the Southeast Asian nation.
Lee had been prime minister or at the very least a senior government leader since 1959. He helped found the PAP in 1954 and is considered instrumental in laying out an economic policy that made Singapore a world business and financial powerhouse.