The 66-year-old fast-food executive is the first of Trump's cabinet nominees to withdraw, dealing a new blow to the president on the heels of the resignation of his embattled national security chief.
"I am withdrawing my nomination for Secretary of Labor. I'm honored to have been considered and am grateful to all who have supported me," Puzder tweeted.
In a statement to US media, Puzder said he reached his decision "after careful consideration and discussions with my family."
"While I won't be serving in the administration, I fully support the president and his highly qualified team," he said.
The White House confirmed Puzder's departure, with press secretary Sean Spicer simply saying: "He withdrew."
Concern swelled this year about Puzder's labor practices and positions, with critics blasting him for opposing a minimum wage for US workers.
He also admitted he had failed to pay taxes on an undocumented employee -- although he paid back taxes long afterward. And he faced embarrassing questions related to a messy divorce that he went through several years ago.
To be confirmed in his post Puzder needed the support of at least 51 out of 100 Senators. But he was staunchly opposed by Democrats and had lost the support of several of the chamber's 52 Republican Senators.
"Andy Puzder made the right and honorable choice by withdrawing from consideration as labor secretary," Republican Senator Marco Rubio said in a tweet.
The top Senate Democrat, Chuck Schumer, described the withdrawal as "a victory for the American worker."
"Puzder should never have even been nominated to lead the Labor Department, and Senate Republicans clearly recognized this too," he said.
"If President Trump is remotely serious about standing up for workers, he will nominate someone for Labor Secretary that champions workers' rights rather than suppresses them."
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Puzder's confirmation hearing, after a number of postponements, had been set for Thursday, when Democratic and Republican senators alike would have had a chance to grill him over his record as head of the parent company of the Hardee's and Carl's Jr restaurant chains.
His withdrawal comes just two days after the explosive resignation of Trump's top aide Michael Flynn, who is accused of lying to White House colleagues about his contacts with Russian officials.