Company president Akio Toyoda apologized for the team's failure to record a single race victory since joining F1 in 2002 despite an estimated annual budget of around $300 million.
This was a difficult but ultimately unavoidable decision, he told a news conference in Tokyo. Since last year with the worsening economic climate, we have been struggling with the question of whether to continue in F1.
We are pulling out of Formula One completely. I offer my deepest apologies to Toyota's many fans for not being able to achieve the results we had targeted.
The decision by the world's largest carmaker to pull out of Formula One comes as the auto industry starts to stabilize following a sales crunch in the wake of the financial crisis.
Cologne-based Toyota's departure as a team and engine supplier deals another major blow to the sport after Japan's number two carmaker Honda quit the series last December.
It leaves Japan without a team in F1 and continues the drain of Japanese companies from motorsport, which has seen Subaru and Suzuki withdraw from the world rallying championship.
Bike maker Kawasaki also scrapped its MotoGP team in the grip of a severe market downturn.
Japanese tiremaker Bridgestone announced on Monday they would not renew their supply contract with Formula One after the 2010 season.
In July, Toyota's Fuji International Speedway circuit surrendered hosting rights for the Japanese Grand Prix in 2010 and beyond to reduce costs amid the global economic downturn.
The pull-out of Japanese companies from F1 began with Honda-backed Super Aguri, who left for financial reasons early last year.
Toyota's exit leaves just three manufacturers in Formula One -- Ferrari (FIAT), Mercedes and Renault.
It also opens the door for BMW-Sauber's new Swiss owners to take their place as the 13th team on the grid.
Toyota signed the concorde agreement earlier this year committing themselves to F1 until at least 2012, so a pullout could also have legal ramifications.
Toyota has forecast an operating loss of 750 billion yen ($8.3 billion) on revenues of 16 trillion yen. It is scheduled to report second-quarter results on Thursday.
(Additional reporting by Yumiko Nishitani; Editing by Peter Rutherford and John O'Brien)