Dumoulin had been suffering from saddle sores in recent days and had been using an antiobiotic cream.
But the pain became too much for the Dutch rider, who pulled out 95km into the 227km stage between Modena and Sestola.
“I am very disappointed to have to pull out of the race, which started so fantastic for me and the team," Dumoulin said.
"The pain was too severe and I couldn’t carry on anymore. We decided this morning to give it another try but unfortunately it doesn’t seem to be improving. We were hoping for a recovery during the rest day but it didn’t get any better.
"I would like to thank all the fans and the team who have supported me. It is a shame that external factors forced me to abandon this great race and not being able to chase further success."
Dumoulin, considered among the possible contenders for overall victory in Turin on May 29, won the opening stage time trial and went on to wear the pink jersey for six days.
He will now turn his focus to reaching peak form for the Rio Olympics road race time trial.
“Tom will first take the time to recover. In the meantime the team will analyze his Giro data and make the best possible plan to work toward the second big goal of the season, the Olympics in Rio," team coach Marc Reef said.
"It’s now too early to speculate on the choices of races, training camps and altitude camps – these decisions still need to be made.”
Giant-Alpecin will now recalibrate its Giro ambitions and look to Nikias Arndt for results in the sprints and breakaway opportunities out on the open road for the rest of the team.