Senator Dastyari has admitted making a mistake in asking a donor with links to the Chinese government to pay a personal debt of more than $1,600 for him.
Now, he has acknowledged that admission was not enough.
The scandal surrounding one of Labor's rising stars has brought up issues ranging from the comical to the complex.
But Senator Sam Dastyari laid out his decision to quit as simply as possible.
"This has been a difficult week, and, this afternoon, I've made a difficult decision. Today, I spoke to my leader, Bill Shorten, and offered my resignation from the frontbench, which he accepted."
Senator Dastyari had been Manager of Opposition Business in the Senate, as well as the Opposition spokesman on consumer affairs.
He stands accused of accepting money in a way that does not pass public scrutiny, even if it does not break any rules or laws.
But he also was under pressure for voicing pro-China views on the South China Sea controversy in the wake of accepting the money.
Senator Dastyari says he is trying to do the right thing now by quitting the frontbench -- and not only for moral reasons.
He says the attention being paid to his scandal was hindering Labor's ability to attack the Government on other issues.
"It's clear to me now that this has become a distraction. The last thing a Government as bad and divided as this one deserves is a free pass. I refuse to be the reason they escape proper scrutiny."
Senator Dastyari says he owes the Labor Party everything and it owes him nothing.
Labor leader Bill Shorten had been supporting the 33-year-old New South Wales powerbroker, saying he was a junior senator who had made a mistake and confessed to it.
Fellow Labor MP Jason Clare has told Sky News his colleague's fate is a stark reminder of the nature of politics.
But he has also praised Senator Dastyari's honesty, saying there is a lesson in his story.
"Politics is a brutal business, and we've seen that on display this afternoon. We should also remember in the context of this, as people run through the entrails of all of this, the only reason this came up in the first place was because he declared this. That was the right thing to do. And so, if anything good comes out of this, hopefully it will remind people about the importance of transparency, of declaring things."
The Government had been pursuing Senator Dastyari with vigour over the matter.
Government senator Cory Bernardi was one of those calling on Mr Dastyari to resign.
He has told Macquarie Radio the fact Senator Dastyari was supported until he resigned reflects poorly on the Labor Party.
"I take no personal pleasure in the resignation of one of the Labor frontbench. But it is the right thing to do. I'm astounded by the support that Bill Shorten and the rest of the Labor frontbench provided to Senator Dastyari."
But in attacking Labor over Senator Dastyari, the Government has been trying to draw a distinction between his case and calls for reform of the political-donations system.
The Government insists the matters are totally separate, despite Labor and the Greens proposing political-donations reform in the wake of the scandal.
Labor frontbencher Andrew Leigh has told the ABC reform is necessary.
"Our view is that we ought to ban foreign donations. Labor's taken a suite of disclosure and donation reforms to the Australian people. We've said that we ought to bring down the disclosure threshold from $13,000 to $1,000."
The Government has not ruled out changing the system.
