World Bank President Paul Wolfowitz reached an agreement Thursday with the bank's board for him to step down as president on June 30.
"He assured us that he acted ethically and in good faith in what he believed were the best interests of the institution and we accept that," the board said in its announcement of Wolfowitz's resignation.
Wolfowitz's leadership came under scrutiny due to the generous compensation he arranged for his girlfriend and bank employee Shaha Riza.
Wolfowitz's departure ends a two-year run at the development bank that was marked by controversy from the start, given his previous role as a major architect of the Iraq war when he served as No. 2 official at the Pentagon.
His departure was all but forced by the finding of a special bank panel that said Wolfowitz violated conflict-of-interest rules in his handling of a 2005 pay package for Riza.
The controversy, which gripped the bank for a month, was seen as a growing liability that threatened to tarnish the poverty-fighting institution's reputation and hobble its ability to persuade countries around the world to contribute billions of dollars to provide financial assistance to poor nations.
Wolfowitz, who had fought the pressure to resign for weeks, said in his own statement Thursday that he was pleased that the board "accepted my assurance that I acted ethically and in good faith in what I believed were the best interests of the institution, including protecting the rights of a valued staff member."
Now, he said, it was in the best interest of the board that its mission "be carried forward under new leadership."
The board's statement made no mention of any financial arrangements related to Wolfowitz's departure, nor did it speak of Riza's future.
The board said it was clear that a number of people had erred in reviewing Riza's pay package.
Wolfowitz said he consulted the bank' ethics board about Riza.
As a result of the controversy, the board pledged to review the World Bank's ethics policies, noting that "the bank's systems did not prove robust to the strain under which they were placed."
The board said it would immediately begin searching for a successor.
By tradition, the World Bank has been run by an American. The Bush administration keenly wanted to keep that decades-old practice firmly intact as the board dealt with Wolfowitz's fate. The United States is the bank's largest shareholder.
"We regret this conclusion," said Deputy White House Press Secretary Tony Fratto. "Paul Wolfowitz is a good man who is passionate about the plight of poor people in the world. We would have preferred that he stay at the Bank, but the President reluctantly accepts his decision."
Wolfowitz waged a vigorous battle to save his job and maintained he had acted in good faith.
European nations had led the charge for Wolfowitz to resign. Those calls were backed by many on the bank's staff, former bank officials, aid groups and some Democratic politicians.
The White House had professed support for Wolfowitz, but indicated on Tuesday for the first time it was open to his departure. It was the same day Wolfowitz made a last-ditch plea to save his job before the board.
Riza worked for the bank before Wolfowitz took over as president in June 2005. She was moved to the State Department to avoid a conflict of interest but stayed on the bank's payroll. Her salary went from close to $133,000 to $180,000. With subsequent raises, it eventually rose to $193,590. The panel concluded that the salary increase Riza received "at Mr. Wolfowitz's direction was in excess of the range" allowed under bank rules.
Wolfowitz "placed himself in a conflict of interest situation" when he became involved in the terms and details of Riza's assignment and pay package and "he should have withdrawn from any decision-making in the matter," the panel said. Under Wolfowitz's contract as well as the code of conduct for board officials, he was required to avoid any conflict of interest, the report said.
The panel acknowledged that the informal advice Wolfowitz received from the bank's ethics committee "was not a model of clarity."
Still, the entire episode involving Wolfowitz's handling of the pay package "underscores that there is a crisis in the leadership of the bank," the panel said.
FOXNews' James Rosen and The Associated Press contributed to this article.