The move comes less than a week after the bank was fined for trying to manipulate inter-bank lending rates, sparking a government inquiry and calls for criminal investigations.

Mr Diamond said he was stepping down because the external pressure on the bank risked "damaging the franchise".

Chancellor George Osborne said he hoped it was the "first step towards a new culture of responsibility" in banking.

"It is the right decision for the country," Mr Osborne said, saying the country needed a strong Barclays concentrating on lending and contributing to economic recovery.

Chairman Marcus Agius, who had announced his own resignation on Monday, will now take over the running of Barclays until a replacement is found.

"I am deeply disappointed that the impression created by the events announced last week about what Barclays and its people stand for could not be further from the truth," Mr Diamond said in a statement.

He will still appear before MPs on the Treasury Committee on Wednesday to answer questions about the Libor affair.  

"I look forward to fulfilling my obligation to contribute to the Treasury Committee's enquiries related to the settlements that Barclays announced last week without my leadership in question," Mr Diamond said.

The Chief Secretary to the Treasury, Danny Alexander, told the BBC that Mr Diamond's resignation was "the right decision".

"There are many questions to be answered about the rate fixing and Barclays will have to answer many of those questions," said Mr Alexander.

"Responsibility has been taken in the right way. Hopefully this will help Barclays to establish the right culture in the future." 

Resignation calls

Last week, regulators in the US and UK fined Barclays £290m ($450m) for attempting to rig Libor and Euribor, the interest rates at which banks lend to each other, which underpin trillions of pounds worth of financial transactions.

Staff did this over a number of years, trying to raise them for profit and then, during the financial crisis, lowering them to hide the level to which Barclays was under financial stress.  

The chairman of the City regulator, the Financial Services Authority (FSA), noted the public outrage at the bank's actions.

"The cynical greed of traders asking their colleagues to falsify their Libor submissions so that they could make bigger profits - has justifiably shocked and angered people, in particular when we are facing hard economic times provoked by the financial crisis," Lord Turner told the FSA's annual meeting.

After Mr Agius announced his resignation on Monday, politicians and shareholders continued to call for Mr Diamond to go.

Responding to news of his departure, opposition leader Ed Miliband said: "It was clear Bob Diamond was not the man to lead the change that Barclays needed."

He repeated Labour's criticism of the terms of the parliamentary inquiry, to be led by the head of the Treasury Committee, that the government announced this week.

"This is about the culture and practices of the entire banking system which is why we need an independent, open, judge-led, public inquiry."

Mr Diamond is one of the UK's highest paid chief executives, earning £20m last year, and was described as "the unacceptable face" of banking by the then business secretary Lord Mandelson in 2010. The details of any severance package are not yet known.

He was head of Barclays Capital, its investment bank division, when his staff were trying to manipulate the key inter-bank rates.

"He maintains that he didn't know what was going on," says BBC business editor Robert Peston. "He feels he was hounded out."

It emerged over the weekend that Mr Diamond spoke to the deputy governor of the Bank of England Andrew Tucker about Barclays' Libor submissions at the height of the credit crunch in 2008.

The details of that telephone conversation will be an important area of questioning at this week's hearing of the Treasury Committee.

Barclays' managers came to believe, after the conversation between Mr Diamond and Mr Tucker, that the Bank of England had sanctioned them to lie about what they were paying to borrow when providing data to the committees that set the Libor rate.