Mr Dunne cited recent polling for his decision to quit politics after more than three decades as an MP.
He is the third leader in just three weeks to resign, following Labour's Andrew Little and the Greens' Metiria Turei.
The 63-year-old's departure is undoubtedly a blow for National, which had relied on his vote in Parliament to help achieve a majority.
The current political environment was extremely volatile and unpredictable," Mr Dunne said in a statement released on Monday afternoon.
"However, I have concluded, based on recent polling, and other soundings I have been taking over the last few weeks, that, the volatility and uncertainty notwithstanding, there is now a mood amongst Ohariu voters for a change of MP, which is unlikely to alter."
Mr Dunne has been an MP for 33 years and was facing a serious challenge in Ohariu from Labour's Greg O'Connor, the former Police Association president.
"I have therefore decided that it is time for me to stand aside, so the people of Ohariu can elect a new electorate MP," Mr Dunne said.
"Consequently, after much consideration and discussion with those closest to me, I am announcing today that I will not be putting forward my nomination for election to the next Parliament. I do so with considerable reluctance, but I have always understood that holding public office is a temporary privilege granted by the people, and can never be taken for granted.
"I have thoroughly enjoyed serving the Ohariu electorate in its various forms since 1984. I thank my constituents, my supporters, my Party, and all those staff members who have worked so loyally and professionally alongside me over the years, but above all, I pay huge thanks to my wife Jennifer, my sons, James and Alastair, raised in the heat of politics, and my entire family for their loyal support, patience and encouragement for so long.
"I am especially proud to have worked alongside successive National- and Labour-led Governments in the collaborative environment of MMP, and to have had the privilege of serving as first an Under-Secretary and then a Minister under seven different Prime Ministers for just on fifteen years. I am very proud of the many changes I have been able to make in my portfolios over the years to make New Zealand a better place in which to live and raise a family.
“But good things cannot last forever. Now it is time for me to put all that behind me, take the election hoardings down, say goodbye to Parliament without bitterness or regret, and get on with life."
Race just got very interesting: Ardern
Prime Minister Bill English had explicitly told National voters to give their candidate vote to Mr Dunne rather than National's candidate Brett Hudson.
However, Mr English today said he respected Mr Dunne's decision.
"Now we have a clear choice in Ohariu between National's Brett Hudson and the Labour candidate."
He thanked Dunne for his contribution to the National-led Government over the last nine years.
"In the last three elections National has won the party vote in Ohariu by a significant margin. We will now fight hard to win the seat as well as maximising our party vote in the electorate."
Labour leader Jacinda Ardern acknowledged Mr Dunne's long service as an MP.
She said Greg O'Connor was a strong candidate and would continue to work hard: "This race just got very, very interesting. It was already interesting but certainly it will be one to watch."
Ms Ardern said it was hard to determine whether winning the seat would be a harder job as a head-to-head with Mr Hudson. "Greg is working hard earning every single vote."
Mr O'Connor paid tribute to Mr Dunne, saying had been a "very, very effective local MP" who had been loyal to Ohariu.
"Yes, it's a surprise," O'Connor told The New Zealand Herald. "But this is an election like no other."
However, he said Mr Dunne's resignation did not change his campaign.
"I've still got a lot of work to do. It certainly doesn't mean that the seat becomes any easier."
Act leader David Seymour tweeted Dunne was a "symbol and enabler of how our major parties drift with no real agenda", and had enjoyed ministerial cars and perks when the housing crisis began under Helen Clark and continued under National.
"He has been swept out by the tidal change against do-nothing politics."
The general election will be held on September 23.
