The news was posted to the Act website by president John Boscawen soon after 10am this morning - an hour before a scheduled press conference at Parliament.
Mr Boscawen said Mr Banks had decided after 36 years of public service to spend more time on his family and private interests.
The decision comes less than 24 hours after the High Court ordered that Mr Banks must stand trial on allegations of electoral fraud.
He will remain as Epsom MP and Act leader until the election.
Speaking to reporters at a press conference this morning, Mr Banks said: "It's time for me to move on from this place''.
He referred to the sentencing of his parents 50 years ago to long prison terms.
"I stood outside the High Court as a 17 year old absolutely committed to a lifetime of hard work, honest endeavour and public service to try and balance the public ledger.''
"Anyone who knows me well knows I would not file a false return of anything."
He was now focused on the "long triangulated legal process to clear my name''.
"I will not be saying anything more about the particulars of the case now before the court except that I'm not fearful of the process or where it ends.''
Mr Banks said his decision to step down was not an admission of guilt.
"I'm not guilty of any offence, I have nothing to fear and nothing to hide.''
Mr Banks said he would quit as Act Leader at the party's annual meeting in March next year.
Mr Boscawen said the Act board would soon open nominations for candidates to stand at the election.
"We have a number of very talented potential candidates and we expect to name our key candidates, including a new candidate for Epsom, by the time of our annual conference in early March.''
Epsom has been held by Act since 2005. Since 2008, Act has supported the Government.
"The importance of this has been recognised by the voters of Epsom, who have continued to elect an ACT MP throughout this time,'' Mr Boscawen said.
Mr Boscawen said the party's board would go through the process of selecting a new leader to replace Mr Banks when he stepped down in March.
"This is not the end of the Act Party. The party can rebuild.''
Without Act in Parliament, "I fear for the National Government'', Mr Boscawen said.
Asked whether he regretted returning to Parliament, Mr Banks said it had been difficult.
"This is a very different place to when I arrived under Robert Muldoon.''
"It's much more feral, much more septic, a lot more nasty.''
He said the decision to step down was absolutely his alone.
Act needed "a circuit breaker''.
"The narrative cannot be about me.''
Mr Key said Mr Banks' had "made the right call".
"I don't think that's a tremendous surprise", he told NewstalkZB. "I actually personally think he's a guy that's had a very good and distinguished career in both local and central government but I think he's made the right call for his family and himself."
Green Party Co-leader Russel Norman said this morning's announcement amounted to a rejection of Mr Banks by Act.
"But, sadly, New Zealand is stuck with him till the next election."
Dr Norman said the fact the Government was now relying on someone facing electoral fraud charges for support called in question the stability of John Key's Government.
"John Key will try to paint this as business as usual, but the wheels have fallen off and he can't keep driving the Government with just one right hand wheel."
