She will be replaced in the cabinet by Baroness Amos, the Foreign Office minister who has been the government's spokeswoman on international development in the House of Lords.
The news comes just days after the controversial Labour MP had missed a crucial House of Commons vote on plans for foundation hospitals.
Ms Short had threatened to quit before the start of war with Iraq, describing Tony Blair as "reckless" during the build-up to military action.
But she decided to stay, saying that to leave on the eve of war would be "copping out" when Tony Blair had no option but to go ahead without a fresh United Nations mandate.
Ms Short told the prime minister of her decision to resign when she telephoned him just 20 minutes before the news was announced.
In her resignation letter to the prime minister, Ms Short accused Mr Blair of breaking assurances he had given her on the role of the United Nations in governing post-conflict Iraq.
She also accused the prime minister and Foreign Secretary Jack Straw of "secretly" negotiating a UN Security Council resolution which contradicted promises she had given in Parliament to MPs.
"This makes my position impossible," she said.