The 44-year-old New Zealander took over from Wallabies coach Michael Cheika in 2016 but has led the Waratahs to the Super Rugby playoffs just once in four seasons, when they reached the semi-finals last year.
This season was heavily disrupted by the protracted sacking for his social media posts of Israel Folau -- the most prolific try-scorer in Super Rugby history -- and the Waratahs finished with a 6-10 record.
"It's a decision I haven't taken lightly and I've been considering over many months but it is absolutely the right time for myself, my family, the team," Gibson told a news conference.
"It's clear we are entering a new cycle in New South Wales Rugby, we've got this wave of young, vibrant talent -- some real gold nuggets -- coming through in the next three or four years.
"It's time for another coach to take them on that journey, I'm a one-year prospect and I believe another coach needs to own that.
"It's time for a new voice and a new direction."
Gibson, who signed a one-year contract extension in February, was backs coach under Cheika when the Waratahs won the Super Rugby title for the first time in 2014.
He described the idea that he might reunite with Cheika at the Wallabies, who had not had an attack coach since Stephen Larkham was sacked in February, as "interesting" but that position was taken by Shaun Berne later on Friday.
Gibson signed off with a record of 28 wins in 64 matches as head coach, having never really got his Wallabies-laden backline firing the way it often threatened to.
The Folau saga this year was undoubtedly a major distraction but finishes of 10th, 16th and 12th in three years of his reign were never really good enough for Australia's richest and best-resourced state.
Gibson said the Folau sacking had no bearing on his decision but admitted it had been "tiring".
"It's been a challenging period leading people through that," he admitted. "The time taken away and invested in that was taken away from our focus on rugby."
With Bernard Foley, Kurtley Beale, Adam Ashley-Cooper, Nick Phipps, Sekope Kepu and Tatafu Polota-Nau all likely to be off or already confirmed departures at the end of the season, the new coach will have something of a rebuilding job to do.
"I'm disappointed to see him go, to be honest," said New South Wales Rugby chief executive Andrew Hore.
"It's the work behind the scenes that you don't see that he'll be remembered for.
"We'll just go through the processes... and work out the characteristics of the person we want to replace him with."
(Reporting by Nick Mulvenney, editing by Greg Stutchbury and Sudipto Ganguly)
