Mr McCloy has written to the general manager of Newcastle council saying he will resign immediately as lord mayor.
The property baron says he made the decision because the controversy surrounding donations he made in the lead-up to the 2011 state election "may affect the proper functioning" of the council.
Premier Mike Baird had called on Mr McCloy to "do the honourable thing", following his evidence to the NSW Independent Commission Against Corruption (ICAC) last week.
In his letter, Mr McCloy said he believed he was leaving the city in "much better shape financially and physically".
He thanked the "thousands of Novocastrians who supported change" in the city.
Revelations at the ICAC that Mr McCloy had given tens of thousands to ex-Hunter MPs Tim Owen and Andrew Cornwell in the lead-up to the 2011 state election forced both men out of parliament.
Mr McCloy had told the ICAC he sometimes felt like a "walking ATM".
The commission is investigating Liberal party funding raising activities in the lead-up to the 2011 state poll.
Newcastle residents will be forced back to the ballot box to vote for a new mayor, on top of two upcoming by-elections in the Hunter.
Newcastle Greens councillor Therese Doyle wants an inquiry into all of the city council's development decisions.
There has been controversy over highrise developments in Newcastle's historic regions, she told ABC radio on Monday.
Meanwhile, the chief of staff of state Opposition leader John Robertson has temporarily stood aside after being named as a possible witness in the ICAC inquiry.
Ian McNamara decided to stand aside until he is called as a witness or informed that his testimony is not required, Mr Robertson said on Monday.
In the past, Mr McNamara has worked for corrupt Labor MP Joe Tripodi.
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