His departure, by mutual consent, was announced at a press conference in central London this evening.
Holloway's position at the club had looked shaky since his side were beaten 4-1 by Fulham on Monday night as a series of crisis talks were called.
But it appears he held as many doubts about his ability to keep the club up as co-chairman Steve Parish.
Holloway said: "This club needs an impetus of energy. But I just feel tired to be honest. I'm worn out.
"I have to hold my hand up and say we didn't keep the spirit that got us up. We changed too much too quickly.
"Someone new coming in now with a tad more experience at this level will have 30 games left."
Holloway, 50, guided Palace to promotion via the play-offs last term, having joined from Blackpool in November 2012.
But they have struggled to compete in the top flight and are second-bottom with only three points from eight matches after signing 14 new players in the summer.
Palace brought in the likes of Marouane Chamakh from Arsenal, Reading pair Adrian Mariappa and Jimmy Kebe, Jerome Thomas from West Brom, Jose Campana from Sevilla, Stephen Dobbie from Brighton, Dwight Gayle from Peterborough, Elliot Grandin from Holloway's former club Blackpool and, on loan, Southampton's Jason Puncheon and Stoke's Cameron Jerome.
Holloway said: "I didn't value enough the spirit of the group that helped us get to the Premier League
"I've lost the spirit of that group. I owe it to the lads to admit that.
"I'm not saying my new signings aren't good enough. But they need to buy into this football club the same way my other lads did."
Parish said Holloway had run himself into the ground doing his own scouting over the summer.
"We came up very much as a Championship club," he said. "The amount of work that went on in the summer was extraordinary, Ian was watching player after player. We should have had more of a scouting infrastructure in place."
Parish emphasised that he never had any intention of sacking Holloway, praising the 50-year-old for doing the "honourable thing" and admitting he was not the man for the job.
He said: "He leaves our club with his head held very high.
"He's a remarkable man, he's done something that most people wouldn't do, and said, 'we need to talk about the situation, I don't think it's working at the moment'."
He confirmed Keith Millen would take temporary charge for the match against Arsenal on Saturday and he had no permanent replacement lined up.
Parish said he would consult Holloway when it came to appointing the new manager, saying they needed someone with more top-flight experience.
Former Stoke boss Tony Pulis would fit that bill, having established the Potters in the top flight before leaving at the end of last season.
On Pulis, Parish said: "He's never been relegated, and he's out of work. We'll look. People with some kind of affinity with the club, that does help when times are tough. I wouldn't discount anyone."