Bishop Belo, 54, has been in ill health recently, and last week returned to East Timor after a three-month stay in Portugal where he received undisclosed medical treatment.
"I am suffering from both physical and mental fatigue that will require a long period of recuperation," Bishop Belo said in a statement released by his diocese in East Timor's capital, Dili.
Bishop Belo and Jose Ramos Horta, a prominent independence activist who is now East Timor's foreign minister, jointly won the Nobel Peace Prize in 1996 for campaigning for the rights and independence of the East Timorese.
The former Portuguese colony of East Timor was invaded by Indonesian forces in 1975 and as head of the church since 1983, Bishop Belo became a symbol of peaceful resistance and a vocal opponent of Indonesia's often-repressive policies.
Bloody vote
In August 1999 East Timor overwhelmingly voted for independence in a United Nations-backed referendum.
Before, during and after the vote, Jakarta-backed militia gangs opposed to independence went on the rampage, killing more than 1,000 people and forcing 250,000 people from their homes.
Bishop Belo was airlifted to Australia after militia gangs set his home on fire. The gang then attacked civilians who were sheltering in the grounds of his home.
Bishop Belo returned to Dili after international peacekeepers arrived to restore order. East Timor finally gained full independence in May this year following a period of transitional administration by the UN.
The bishop said he had informed Pope John Paul II of his decision to resign.
The Vatican later confirmed the Pope had accepted the resignation.
Agio Pereira, chief of staff for East Timor President Xanana Gusmao, told Reuters news agency: "[Bishop Belo] has been in this position for almost 20 years and during a most tumultuous time. But if he says he is tired, well, he has already given so much to our country".