No date was set for Campbell's departure and his successor was not named, the prime minister's office said.
CBS News Correspondent Steve Holt reports the resignation of Blair's most important aide would seem to be a staggering blow to a prime minister suffering the worst crisis of his career.
The failure of search teams to find weapons in Iraq, and the questions about the veracity of the case for war, have sent Blair's approval ratings plummeting. According to a poll published in Friday's Daily Telegraph, only 22 percent of respondents said they feel Blair's government is trustworthy.
Campbell was at the center of media allegations that Blair's office exaggerated the threat posed by Iraqi weapons in an intelligence dossier used to win support for military action against Iraq.
He has denied the allegations, and intelligence chiefs have for the most part backed up his version of events.
But he was at the forefront of an extraordinary confrontation between Downing Street and the British Broadcasting Corporation over a BBC story claiming he had "sexed up" the September dossier on Iraq's alleged weapons.
The report alleged that Blair's office inserted a claim that Saddam Hussein could deploy weapons of mass destruction within 45 minutes in a September dossier against the wishes of intelligence officials.
For weeks, the government and BBC — which is financed with tax revenue — accused one another of lying, and at one stage Campbell gave the BBC an ultimatum to admit it had misreported.
The source for the BBC story, weapons expert David Kelly, killed himself after being publicly identified last month. Campbell testified before a judicial inquiry into the suicide last week. Blair appeared before the same panel Thursday.
In a resignation statement, Campbell said he was quitting for family reasons and added he intended to step down from his position in "a few weeks."
In his statement, Campbell said he had made the decision to resign last April. He did not link his departure to the inquiry into Kelly's death.
Campbell, a former journalist, wielded enormous influence in the prime minister's office.
Campbell was credited with helping to make the Labor party more electable by severing links to the group's socialist past, but die-hard left-wing members have never forgiven the changes he and Blair made.
He was also a lightning rod for criticism that Blair's team was obsessed with "spin."
That criticism intensified over his role in drafting the case for war on Iraq.
While intelligence committee head John Scarlett said he was in charge of preparing the dossier and was under no political pressure, he did receive advice on wording and presentation from Campbell. According to the Times of London, Scarlett testified that Campbell asked for the language to be "tightened." Campbell had said he had no role in shaping the 45-minute claim.
Blair said Thursday he would have had to resign if there had been any truth in the BBC report, which he said leveled an "absolutely fundamental charge" against his government.
Blair said the dossier was based on intelligence sources and was not manipulated for political reasons.
Blair has denied responsibility for identifying Kelly. But in Wednesday's hearing, Defense Secretary Geoff Hoon said Blair's office authorized a news release saying an unidentified official at the Defense Ministry — where Kelly worked — had acknowledged speaking to a BBC journalist. That created a rush by British reporters to identify the source, with some guessing names until they came up with Kelly's and it was confirmed by the Defense Ministry.
The hearings have uncovered scraps of evidence alternately favoring Blair or the BBC.
Contrary to the united front the news network projected, internal emails showed that the BBC was worried that their story had involved "sloppy reporting."
But the inquiry also revealed emails showing that some of Blair's own aides expressed doubts about the strengths of the evidence.
Evidence showed some intelligence officers were unhappy about the dossier. Scarlett denied it.