Aerosmith frontman has been a judge on the US show since 2010 and was due to continue for its 12th season this autumn.
Steven Tyler’s departure comes as ratings continue to fall and fellow judge Jennifer Lopez considers her future.
The rocker said he thought “long” and “hard” about whether to continue but said the time was right to return to his “first love”, his band.
“I’ve decided it’s time for me to let go of my mistress American Idol before she boils my rabbit.
“I strayed from my first love, Aerosmith, and I’m back – but instead of begging on my hands and knees, I’ve got two fists in the air and I’m kicking the door open with my band.”
Aerosmith is on a nationwide tour with Steven Tyler and has an album due out in the autumn.
Based on the UK show Pop Idol, American Idol first aired in 2002 and quickly became a major success, transforming music hopefuls such as Jennifer Hudson into stars.
By 2005 it had become the biggest show on US television.
However it has struggled to keep viewers hooked since the departure of Simon Cowell in 2010 to launch American X-Factor, which aired for the first time last year.
The season 11 finale drew 21.5 million viewers – a record low – and ended the season at No. 2 in the ratings, with an average 20 million viewers for the mid-week shows.
There is now a question mark over whether Jennifer Lopez will return for the 12th season, despite a contract worth a reported $12 million and the show’s undoubted boost to her career.
Speaking to the Press Association after Steven Tyler’s announcement, Jennifer Lopez said she was saddened to hear that he was leaving and was weighing up her own decision.
“I can’t even imagine anyone else there right now because I’ve just spent two years sitting next to him,” she said.
“I love Steven, and we became close during that time. We were a great support for each other, on an adventure that neither one of us knew what it was going to be. So it’s hard to hear that he won’t be doing it.”
Jennifer Lopez has already indicated that there is a strong likelihood that she will not return.
“All hope is never lost – not all hope – but at the same time, there are too many things that I need to think about,” she said.
Speculation about potential new panelists has focused on Mariah Carey, with former Idol runner-up Adam Lambert a popular choice among fans.
Commenting on Steven Tyler’s departure, Mark Darnell at Fox, said: “We are very sad that Steven has chosen to focus more on his music, but we always knew when we hired a rock ‘n’ roll legend, he would go back to music.”
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