The decision marks an abrupt turnaround. Earlier this week, Dodd said he was committed to running for a sixth term.
Dodd's political stock fell after a controversy involving low-rate mortgages he received under a VIP program, the financial meltdown and his failed 2008 presidential bid.
The 65-year-old chairman of the Senate Banking Committee was trailing former Republican Congressman Rob Simmons in the polls.
Connecticut's popular Democratic attorney general, Richard Blumenthal, is set to officially announce later Wednesday he will run for Dodd's seat.
