Mayor Robert Levy's resignation is effective immediately, attorney Edwin Jacobs said.
"Mr. Levy has concluded that public confidence is so eroded by these circumstances that the only responsible action is to step down," Jacobs said. "He does so with great regret and with apologies to his supporters, to the people of Atlantic City, and to his family and friends."
Jacobs said Levy is troubled by a federal probe into whether he embellished his military record to increase his pension as an Army veteran, reports CBS News affiliate KYW. On Tuesday, Jacobs said his client returned home last Thursday after spending five days at a central New Jersey rehab clinic.
City officials last heard from Levy on Sept. 26, when he called in sick, climbed into his city-issued Dodge Durango and seemingly vanished. His aides would only say that he was hospitalized somewhere, and would not disclose his condition.
Details about the mayor's whereabouts began emerging Tuesday, when Jacobs met with a judge considering a City Council request to vacate the Levy's office.
Afterward, Jacobs announced that Levy was at home after spending a week at the clinic, but he wouldn't elaborate on why Levy went there.
In a statement Wednesday, Jacobs cited "multiple health problems" as a factor in Levy's resignation, but did not provide further details.
Last fall, The Press of Atlantic City reported that the Vietnam veteran's claims that he was a member of the Green Berets were untrue. He apologized, but federal authorities have been looking into whether the 64-year-old Levy made that claim to increase his veteran's benefit payments.
On Wednesday, Jacobs said the mayor was in discussions with the U.S. Attorney's Office about resolving the investigation.
Levy served two tours of duty in Vietnam, and was awarded numerous medals and citations. But it was two of those awards that have him in trouble with federal prosecutors.
Jacobs said two of Levy's military decorations appear to have been issued improperly, without "an appropriate military order."
"This, in turn, creates a question as to a portion of Mr. Levy's disability benefits," Jacobs said.
Levy's resignation clears the way for City Council President William "Speedy" Marsh to take over as interim mayor, according to Marsh's lawyer, James Leonard.
"He is going to assume the office of mayor today," Leonard said Wednesday.
Before Levy's resignation, fed-up members of the city council had asked a judge to declare the mayor's office vacant.
Levy's disappearance roiled this casino resort, where four of the eight mayors that preceded him were arrested on corruption charges.