"It is one thing to work in a partially free country, as Russia was six years ago," Mr Illarionov, 44, was quoted as saying by the ITAR-TASS news agency.
"It's another when the country has stopped being politically free."
Mr Putin signed the resignation late on Wednesday, the Kremlin press service said.
Mr Illarionov has long been the highest profile critic within the Kremlin of the Putin administration, in particular slamming the break-up of the giant oil company Yukos and the imprisonment of its founder Mikhail Khodorkovsky on what critics called politically motivated charges.
He described the Yukos takeover in 2004 as the "scam of the year."
Lost influence
Analysts said Mr Illarionov had already lost influence in the Kremlin inner circle, but was kept on as a liberal figleaf to ease western concerns about growing state control over the economy and Mr Putin's domination of the political system.
"Illarionov was largely window dressing for the administration, a symbol of the liberalism and pluralism that are insufficient in real life," Indem foundation director Georgy Satarov told Echo Moscow radio. "I think he was sick of fulfilling this role."
Mikhail Delyagin, head of the Institute of Globalisation Problems, told Echo Moscow the decision to quit could not have been easy.
"People who split with their boss by their own free will usually become personal enemies of that boss, and with the current president that is not only unpleasant, but dangerous," Mr Delyagin said.
In his resignation comments, Mr Illarionov said Russia had become unrecognisable from the country he knew when joining the Kremlin as then acting-president Putin's economic adviser in 2000.
"In these six years the situation has radically changed and in the last year it became clear that not only the political but economic model of the country has changed," he was quoted as saying by ITAR-TASS.
"I did not go to work for such a country, or sign a contract, or swear an oath."
RIA-Novosti quoted him as saying: "As long as I could do at least something, including talking, I thought it was important to stay."
Lonely figure
Mr Illarionov has cut an increasingly lonely figure as he lashed out at the direction the country was taking - in stark contrast to the rest of the Kremlin's tightly managed information machine.
Just last week, in what may have been his last major press conference as adviser, he said: "Russia has ceased being a free and democratic country."
In January of this year he lost his job as the Kremlin's point man on relations with the influential Group of Eight (G8), which groups Britain, Canada, France, Germany, Italy, Japan, Russia and the US. Russia takes over chairmanship of the G8 next year.