Chief William Bamattre, whose predecessor also left abruptly a decade ago during a similar racially charged crisis, told Mayor Antonio Villaraigosa in a letter that he will step down Jan. 1.
In a statement from his office, the chief did not directly address the controversy but said he was "very proud of the dedication, courage and extraordinary commitment and efforts of our firefighters."
The departure of Bamattre, who led the Los Angeles Fire Department for more than a decade, makes the chief the highest-level casualty of the lawsuit.
Bamattre "became a liability for the department and the city," one official, who asked not to be identified because of the sensitivity of the matter, told the LA Times. "The situation became unsustainable."
The City Council voted 11-1 earlier this month to to settle his racial discrimination lawsuit.
The emotional debate over the incident has put the spotlight on a larger issue that often goes unmentioned: the hazing rituals that are part of a macho culture that is the firefighter's world.
Almost immediately, photos surfaced on the Internet of Pierce engaging in other firehouse pranks. Mayor Antonio Villaraigosa took notice and vetoed the award.
On Wednesday, the City Council sustained the mayor's veto, voting 9-6 against a motion to override.
"It's a bad situation. It's a bad prank, but I cannot connect that to racism," Councilman Dennis Zine said.
The council decision sends the lawsuit to court on March 19, although the city attorney could conduct further settlement talks with Pierce.
An after-hours call to Pierce's attorney, Genie Harrison, was not immediately returned.
Critics on the Internet and talk radio shows have accused Pierce, 51, of playing the "race card." The veteran firefighter responded that his 20-year career was destroyed after he broke a code of silence and spoke out against something he believes was racially motivated and crossed the line of typical firehouse fun.
"This is wrong," an emotional Pierce said earlier this week. "If four black firemen did it to a white fireman, I would stand up."
As people took sides, sociologists and other observers said the incident has focused attention on an insular culture that people outside of a firehouse rarely learn much about.
"It's a lot like what happens in Vegas stays in Vegas," said anthropologist Jorja Leap, who teaches at UCLA's department of social welfare. "What goes on in the firehouse stays in the firehouse as long the firefighters ride in on their big red trucks and put out the fire."
Occasionally stories do spill out, usually when lawsuits are filed or damages are awarded.