Key, his voice shaking with emotion, said he told his Cabinet of his decision this morning
"This is the hardest decision I've ever made and I don't know what I'll do next."
Key cited family reasons for leaving, saying the job had required great sacrifices "from those who are dearest to me".
His wife Bronagh had endured "many lonely nights" and his children Stephie and Max had been put under "extraordinary levels of intrusion".
Key met his wife Bronagh while attending Burnside High School. The pair married in 1984 and have two children, Stephie and Max.
"Bronagh has made a significant sacrifice during my time in politics, and now is the right time for me to take a step back in my career and spend more time at home."
The National Party caucus will hold a meeting on December 12 to decide the new party leader and Prime Minister.
Key said he would support whoever the caucus chose, but he endorsed Bill English as his replacement.
Key: 'I went on my terms'
John Key has told Newstalk ZB's Larry Williams this was the toughest decision he has ever made.
"By a country mile it's a magnificent job its and absolute privilege and it's a real opportunity."
"I've seen leaders stay that little bit too long."
When asked why he took the position in the first place, Key said he believed he could make a real difference to New Zealand.
"it was a unique opportunity to be part of a team that did some great things in New Zealand and will continue to do so.
"Moneys not always the motivating factor."
He gave the example of former Australian PM John Howard.
Key said it was lonely for Bronagh who he has been married to for 32 years but denied that she had led him to make the decision.
"We talked about it and she likes the concept of me being home more but there was no ultimatum."
When asked why he took the position in the first place, Key said he believed he could make a real difference to New Zealand.
"it was a unique opportunity to be part of a team that did some great things in New Zealand and will continue to do so.
"Moneys not always the motivating factor."
"I haven't felt like I'm drowning underneath it I feel like I thrived on the job."
John Key told Newstalk ZB's Larry Williams the timing of his resignation feels right.
"To me it feels right and I can't exactly put my finger on why. I went on my terms and so few leaders do that."
Key told Williams that his time as Prime Minister has had both a good and bad effect on his children Max and Stephie.
He admitted being in the public eye was an intrusion for his kids, but said they also had many positive experiences.
Key said there were so many nights Bronagh spent alone or was left cooking for one.
According to Key, he did not stay until the next election despite thinking he could get re-elected.
"I just felt I couldn't and wouldn't stay much longer," said Key.
"Either I'm going to be deliberately misleading the public or alternatively I have to stay another two and a bit years and it's a long time."
Key said his decision was not just about family but also transitioning at a time of strength for the National Party.
"I wanted to make sure that I could transition to a new Prime Minister without the baggage,"
The National Party is in a great position with a lot of funding and support Key told Williams.
"I'm going out on a high," said Key.
"I don't want people to think I was slacking off on the job.
"You're always on call and always working and that's the nature of it. But that's what make it so exhilarating."
Boag: Key's made the right decision
Former National Party President Michelle Boag says John Key has made the right decision in stepping down as Prime Minister.
Key made the shock announcement at a press conference this afternoon.
Boag thinks he'd made the decision he didn't want to take the party into a fourth term.
She told Newstalk ZB's Kerre and Mark that if that was the case, the honest thing to do was step aside.
See her interview with NZ Herald Focus here.
