Retired judge Baroness Butler-Sloss has stepped down as head of a probe into child sex abuse saying she was "not the right person" for the job.
Downing Street said "it was entirely her decision" and a new chair would be appointed within days.
Lady Butler-Sloss has been under pressure to quit from MPs and victims concerned about her family links.
Her late brother, Sir Michael Havers, was attorney general in the 1980s.
Downing Street said it would "take a few days" to appoint a new chairman and appeared to indicate that whoever was chosen would not be so closely linked to the establishment.
Lady Butler-Sloss said she "did not sufficiently consider" whether her family links would cause difficulties in the inquiry.
'Shambolic' process
Keith Vaz, chairman of the Commons home affairs select committee, which is also investigating historical child sex abuse, said the peer had made the "right decision".
"The whole inquiry process is becoming shambolic: missing files, ministers refusing to read reports and now the chair resigning before the inquiry is has even commenced," he said.
Emma Jones, from Leigh Day solicitors, which represents alleged victims of child abuse, said it was a "sensible decision".
Esther Rantzen, founder of ChildLine, said ministers "must not appoint someone with obvious links to the establishment".
"This inquiry, if properly led, could provide a platform for people who were unheard, invisible and have suffered a lifetime of abuse," she said.
In a statement, Lady Butler-Sloss said she had been "honoured" to chair the inquiry and had hoped to "make a useful contribution".
Important issues
But, she added: "It has become apparent over the last few days, however, that there is a widespread perception, particularly among victim and survivor groups, that I am not the right person to chair the inquiry.
"It has also become clear to me that I did not sufficiently consider whether my background and the fact my brother had been attorney general would cause difficulties.
"This is a victim-orientated inquiry and those who wish to be heard must have confidence that the members of the panel will pay proper regard to their concerns and give appropriate advice to government.
"Nor should media attention be allowed to be diverted from the extremely important issues at stake, namely whether enough has been done to protect children from sexual abuse and hold to account those who commit these appalling crimes.
"Having listened to the concerns of victim and survivor groups and the criticisms of MPs and the media, I have come to the conclusion that I should not chair this inquiry and have so informed the Home Secretary."
The inquiry was set up to examine how state institutions handled their duty of care to protect children from paedophiles.
What next? By BBC political correspondent Iain Watson
Most public bodies at least claim they appoint people because of what they know, not who they know. But it was Lady Butler-Sloss's family and political connections - not her experience and knowledge - which led to her resignation.
There will be no rush to appoint her successor - it could take several days. That's because while her resignation was unfortunate, a second controversial appointment might look like carelessness at the top of government.
Already there are calls for a figure less linked to the establishment to be appointed - but if a legal background, along with the security clearance to read confidential government papers is required, then that could be easier said than done.
David Cameron's spokesman said there had been no change in the view of the prime minister or Home Secretary Theresa May about Lady Butler-Sloss's integrity or suitability for the job.
"She has taken the decision to step down as chair of the panel inquiry," he said. "It is entirely her decision.
"The government's view hasn't changed, that she would have done a first-class job as chair. The reasons for her appointment still absolutely stand in terms of her professional expertise and her integrity, which I don't think has been questioned from any quarter whatsoever, and rightly so."
No 10 said the decision had not been prompted by suggestions a co-chairman might be appointed to the panel.
Mrs May, who spoke to Lady Butler-Sloss over the weekend, said she was "deeply saddened" by her decision, "but understand and respect her reasons".
"Baroness Butler-Sloss is a woman of the highest integrity and compassion and continues to have an enormous contribution to make to public life," she added.
BBC political correspondent Norman Smith said questions had been raised over Lady Butler-Sloss's age - she will be 81 next month.
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