It means Postecoglou won’t be going to the World Cup in Russia next year.
He announced his decision at a press conference on Wednesday morning alongside FFA boss David Gallop.
There has been much speculation over what the coach would do ahead of the 2018 tournament after he refused to confirm he would lead the Socceroos to Russia.
Postecoglou met with FFA chairman Steven Lowy and chief executive Gallop in Sydney ahead of the FFA Cup final to begin talks on Tuesday.
Lowy and Gallop were eager to retain Postecoglou in the job after he had led Australia to the 2018 FIFA World Cup with a 3-1 win last week over Honduras, concluding a marathon 22-match qualification process.
But the 52-year-old has hinted at grievances in the role and could yet walk ahead of next year's tournament in Russia.
Postecoglou admitted: "It's been the toughest decision."
“It has been a privilege for me to coach my country’s national team, to lead them at the 2014 World Cup, to win the Asian Cup in 2015 and now to have qualified for the World Cup next year. I said we would do it and we have done it," he continued
"All this however, has taken a toll on me both personally and professionally. I have invested all I can knowing how important a period it was for Australian football. It is with a heavy heart that I must now end the journey.
"To coach your own country is the greatest privilege but it also has enormous responsibility. I feel now is the right time to pass on that responsibility to someone who will have the energy it requires.
"I owe this to the FFA, the players and the fans. I look forward to watching the team take on the World next year. I have no doubt that road ahead will have many special moments and no one will be happier than me watching and cheering from afar."
