Whether the move will silence his most vocal critics and who will succeed Eisner remained in doubt.
In a letter written to Disney's board, Eisner said he intends to step down when his current contract expires on Sept. 30, 2006.
"Until then I shall continue to exert every effort to help the company achieve our goals, to assist the board in selecting the new chief executive officer, and to make the transition expeditious, efficient, and smooth and easy," Eisner wrote.
Eisner joined the company in 1984 along with former Warner Bros. executive Frank Wells at the behest of Roy E. Disney, nephew of company co-founder Walt Disney.
Eisner and Wells transformed Disney by revitalizing its dormant animation efforts, expanding the theme parks and, most dramatically, by purchasing Capital Cities/ABC in 1995, thus adding ABC, ESPN and other networks to the mix.
But since 1996, Disney has stumbled it's stock price fell as ratings slipped at ABC, the company made some questionable acquisitions, and investors began to question Eisner's control over his board of directors.
Roy Disney and ally Stanley Gold, once Eisner's strongest backers, resigned from the board in November and championed an effort to oust Eisner.
That campaign culminated in an unprecedented vote of no confidence at Disney's March shareholders meeting in Philadelphia. Investors withheld 45 percent of their votes to re-elect Eisner to the board, and delivered similar blows to other board members.
As a result, the board stripped Eisner of his chairmanship, while also expressing confidence in his management skills.
Sensing a weakness, cable television giant Comcast Corp. launched a bid for Disney in February. Disney's board rejected it as too low and Comcast later withdrew its offer after it became clear Eisner had more support than first thought.
Roy Disney and Gold sustained their ouster efforts and said they would run a challenge slate of directors at next year's shareholder meeting.
Eisner's announced retirement may undermine those efforts.
"I think this will relieve some of the pressure on the Disney board, and will likely go a long way to appeasing the concerns of many institutional investors as to a succession plan and also the poor financial and stock price performance over the past few years," said Greg Taxin, chief executive of Glass, Lewis & Co., an institutional investment research firm that had recommended withholding support from Eisner.
Eisner has strongly endorsed Disney President Robert Iger as a potential successor. But the board could look to other executives in the company or even former Disney executives who now lead their own companies.
Likely candidates include Paul Pressler, CEO of Gap. Inc., or Meg Whitman, CEO of eBay Inc.
Former Viacom President Mel Karmazin and News Corp. chief operating officer Peter Chernin are also often mentioned as possible successors.
As for Eisner, he will celebrate his 20th anniversary later this month and is set to preside over the 50th anniversary of Disneyland next July.
In his letter, Eisner said Disney was in a turnaround and praised the board for weathering difficult times.
"I have been told by you, by friends, but mostly by outside observers, that it is quite extraordinary that we have been able to remain focused on our objectives and have managed to run the company so well amid the distractions that have taken huge chunks of time during the past several years," Eisner wrote.
Eisner, a workaholic who reads scripts at night, watches every television pilot and even helps in the design of theme parks, told the board he looked forward to the next two years.
"My affection for Disney will never retire," Eisner wrote. "And, like our campaign, suggested by (wife) Jane in 1986 that seems to resonate for so many, I can only conclude by telling you what I am doing next. "I'm going to Disneyland!"