Jonathan Arnott said he had been "let down badly" by those in the party who have "said one thing in private and done another in public."
"That's politics, but UKIP should be better than that," he added.
The MEP claimed he is "leading the race across the north" of England to succeed Nigel Farage, but lacks the "overwhelming" support required to have a realistic chance of winning.
Mr Arnott's withdrawal leaves MEPs Bill Etheridge and Diane James along with Elizabeth Jones, Councillor Lisa Duffy and Phillip Broughton battling to replace Mr Farage.
The victor will be announced at UKIP's annual conference in Bournemouth on September 15.
Mr Arnott had said he wanted to appeal to a broader range of voters and there "actually isn't that much wrong" with UKIP's policies.
But he said he had not been prepared - despite suggestions from some - to "abandon my principles and adopt a strategy of courting controversy in order to gain column inches".
Mr Arnott, in a statement, also said he is convinced about his strong support among UKIP members in the north of England.
He explained: "I've built a level of support for my campaign which would no doubt be sufficient for a second-place finish nationally, but no more than that - and there is no prize for a silver medal in a leadership contest."
Mr Arnott went on: "In a smaller field of candidates, there would be a massive chance for a uniting, positive, compromise candidate to win. That is not the race that we are in.
"Having spoken at length to colleagues, friends and family over recent days, I have come to the conclusion that it is appropriate at this time for me to step down from the leadership race.
"This will provide sufficient time for my supporters to endorse another candidate, whoever she may be."
He will back either Diane James or Lisa Duffy.
