He will be replaced by Martin Parkinson, Secretary to the Department of Climate Change since December 2007 and a former deputy secretary to Treasury.
Dr Henry was first appointed to head Treasury by the Howard government in April 2001, and reappointed for a further five years in April 2006.
"Dr Henry has made a major contribution to the well-being of Australians and the prosperity of the nation during 25 years at Treasury," Prime Minister Julia Gillard said in a statement on Tuesday.
"He has become one of the greatest of all Treasury secretaries."
Dr Henry was appointed a Companion of the Order of Australia General Division (AC) in the Australia Day Honours 2007 for service to the development and implementation of economic and taxation policy, to the finance sector through a range of banking and regulatory bodies.
The appointment also acknowledged his service to the community in the area of welfare and care of native wildlife.
He was chair of the review team for Australia's Future Tax System - the so-called Henry tax review.
Dr Henry has a long career in Treasury and related areas dating back to 1984. He was senior adviser to then treasurer Paul Keating between 1986 and 1991.
Dr Henry is an ex-officio member of the Board of Taxation, member of the Board of the Reserve Bank of Australia, Alternate Governor (for Australia) of the International Monetary Fund and chairman of the Advisory Board of the Australian Office of Financial Management.
Treasurer Wayne Swan said Dr Henry's performance during the global financial crisis and his central role in tax reform had made him arguably the finest Australian public servant since HC "Nugget" Coombs.
"I consider myself very fortunate to have been treasurer during his tenure as secretary," he said in a statement.
"I'm sure my predecessor Peter Costello would feel the same way."
The treasurer described Dr Parkinson as a tremendously capable public servant in his own right.
"I am certain will make a successful Treasury secretary.
"I look forward to working with Ken for the remainder of his tenure, and with Martin for the years that follow, to ensure the Australian economy remains the envy of the world."
Ms Gillard said to facilitate a smooth transition in the pre-May budget period, Dr Parkinson's appointment will take effect from March 7, 2011.
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