Stormont First Minister Peter Robinson is standing aside, and the majority of his Democratic Unionist ministers are to resign, with party colleague Arlene Foster to take over as acting First Minister.
The surprise move from the DUP leader comes amid an Assembly crisis in the wake of a murder linked to the IRA murder.
Mr Robinson had warned that his ministers would resign if the Assembly was not adjourned or the British Government did not suspend the institutions.
The DUP step will not bring an immediate collapse of the Assembly institutions.
Mrs Foster, a Fermanagh and South Tyrone MLA, is the current finance minister and she will also continue in that role.
Mr Robinson said: “In light of the decision by republicans, nationalists and the UUP to continue with business as usual in the Assembly, I am therefore standing aside as First Minister and other DUP ministers will resign with immediate effect with the exception of Arlene Foster.
“I have asked Arlene to remain in post as Finance Minister and acting First Minister to ensure that nationalists and republicans are not able to take financial and other decisions that may be detrimental to Northern Ireland.”
Executive departments will still function under the temporary arrangements but the Executive will not meet.
The DUP wanted all Assembly business suspended to allow crisis talks to take place about the political consequences of the murder of Kevin McGuigan.
Northern Ireland Secretary Theresa Villiers said she would not be suspending the devolved institutions and called on the local parties to come together.
She said the DUP resignations would mean the functioning of the Executive became much more difficult.
“It is a sign of a complete breakdown in working relationships within the Executive.”
The Minister for Foreign Affairs, Charlie Flanagan, said he regrets Mr Robinson's decision.
He said: "What we want is for the devolved power-sharing Executive and Assembly to work as envisaged in the Good Friday Agreement and deliver peace, prosperity and reconciliation for the people of Northern Ireland.
"Minister Sherlock and I, with the strong support of the Taoiseach and Tánaiste, have been working with the Secretary of State and with the Northern Ireland parties to resolve the critical issues which threaten the future of the power-sharing institutions.
"The Irish Government is absolutely committed to the full and effective operation of the Institutions of the Good Friday Agreement.
"Following today's serious developments, the power-sharing institutions are on the edge of the precipice. I urge Northern Ireland's political leaders to take a step back and consider the gains achieved over recent years, the benefits to the people of Northern Ireland and what is now at stake.
"I encourage all parties to reflect carefully. The Secretary of State and I will be here in Stormont House on Monday morning and I invite the parties to join us for discussions on how we find a way through the current serious impasse. We will of course remain available to the parties over the weekend."
Mr Robinson’s announcement came after Sinn Féin, the SDLP and the Ulster Unionists voted against a DUP proposal to adjourn the Assembly.
He issued his ultimatum on Wednesday after the arrest of three senior republicans, including Sinn Féin's northern chairman Bobby Storey, over the fatal shooting of former IRA man Mr McGuigan. The men remain in custody.
Police have said current members of the IRA were involved in last month’s shooting of Mr McGuigan in a suspected revenge attack for the murder of former IRA commander Gerard “Jock” Davison in Belfast three months earlier.
The revelations about the IRA have heaped pressure on Sinn Féin to explain why the supposedly defunct paramilitary organisation is still in existence.