American International Group Inc
Liddy, named chairman and chief executive of AIG in September after the government rescued it with a massive injection of capital, had always planned for his stay at the company to be temporary.
The former Allstate executive's reign at AIG will be best remembered for the public scolding he received from lawmakers over bonuses paid to executives of the insurer's troubled financial product unit.
Liddy, who was being paid only $1 in annual salary, will not receive a severance package.
AIG, which now owes taxpayers more than $85 billion, could take several years to repay its obligations, Liddy said.
In total, taxpayers have put up to $180 billion at AIG's disposal, including billions of dollars more to buy toxic assets that led to the company's losses and $30 billion in a credit facility that is as yet untapped.
AIG should have a leadership team committed to a similar time horizon and prepared to carry the plan to completion, Liddy said.
Liddy has recommended to the board they find a separate chairman for the insurer, splitting the two roles, AIG said in a statement.
In an interview with Reuters, Liddy said he does not expect finding replacements to take more than a few months. The next chairman should be knowledgeable in the ways of Washington, he added, while the next CEO should have a time horizon of at least three to five years.
In the eight months since Liddy took over, he has overseen asset sales of more than $5 billion and has laid a course for several larger divisions to potentially be spun off through initial public offerings early in 2010.
The board will launch its search immediately. Liddy will remain on the job until the search is concluded, he added.
The U.S. government rescued AIG after money-losing bets on derivatives threatened to drive the company into bankruptcy.
(Reporting by Lilla Zuill; Editing by Toni Reinhold and Andre Grenon.)