Lutz Bachmann, a 41-year-old convicted burglar, had appeared on the front page of top-selling daily newspaper Bild on Wednesday sporting a Hitler moustache and haircut. Bild and another paper said he had called aslyum-seekers "animals" and "scumbags".
Kathrin Oertel, another PEGIDA co-founder, said his resignation had nothing to do with the Hitler photo but was linked to comments posted on the internet.
"Yes, I can confirm that Lutz Bachmann has offered his resignation and it was accepted," Oertel told Reuters.
She added: "PEGIDA will go on."
The news came just as sympathisers with PEGIDA (Patriotic Europeans Against the Islamisation of the West), which is based in Dresden, were due to stage a march in another east German city, Leipzig.
PEGIDA has forced itself onto the political agenda with its anti-immigrant slogans that have attracted tens of thousands to regular rallies in Dresden. Its Leipzig sister movement, LEGIDA, was due to march on Wednesday evening after police banned a PEGIDA march in Dresden on Monday due to a threat of an attack.
Bachmann, who denies he is a racist, had heard on Wednesday that he faces a criminal investigation for incitement to racial hatred. State prosecutors in Dresden said preliminary proceedings had been launched following the Bild report.
Impulsive
Bild printed the photo of him with Hitler-style moustache and hair on its front page. It quoted him as saying the photo had been taken as a joke, prompted by a recent satirical book about Hitler called "Er ist wieder da" ("Look Who's Back").
The Dresdner Morgenpost newspaper also quoted what it said were Facebook messages from Bachmann saying asylum seekers acted like "scumbags" at the welfare office and that extra security was needed "to protect employees from the animals".
Deputy Chancellor Sigmar Gabriel, the Social Democrat leader, said the real face of PEGIDA had been exposed: "Anyone who puts on a Hitler disguise is either an idiot or a Nazi."
In an interview with Reuters last week, Bachmann played down a ribald comment made in 2013, seized on by the media, that "eco-terrorist" Greens, first and foremost former party leader Claudia Roth, should be "summarily executed".
"I am an impulsive person...I regret I didn't resist my impulsiveness."
