"Of course, we, the employees in Hinwil and Munich, would all have liked to continue this ambitious campaign and show that this season was just a hiccup following three successful years," said team boss Mario Theissen.
"But I can understand why this decision was made from a corporate perspective.
"We will now focus sharply on the remaining races and demonstrate our fighting spirit and put in a good result as we bid farewell to Formula 1 racing."
Bernie Ecclestone, Formula 1's commercial rights holder, believes the team's inability to match their title ambitions is behind their withdrawal.
"It has not quite been like that so perhaps that's why they've [decided] to stop," Ecclestone told BBC Radio 5 Live.
"When you consider how much money they've spent and the results they've got, it's probably not such a good investment.
"They were quite sure that they were going to win the championship within three years, and I was hoping they would."
However, the sport's governing body, the FIA, said it was not surprised by BMW's decision given the difficult global economic climate.
"The FIA regrets the announcement of BMW's intended withdrawal from Formula 1 but is not surprised by it," a statement said.
"It has been clear for some time that motor sport cannot ignore the world economic crisis.
"Car manufacturers cannot be expected to continue to pour large sums of money into Formula 1 when their survival depends on redundancies, plant closures and the support of the taxpayer."
BMW would be a loss to F1 - Croft
There has long been speculation that BMW could quit F1 along with fellow car manufacturers Toyota and Renault because of the effects of the economic downturn on car sales.
Ecclestone said on Wednesday that Toyota and Renault were among the remaining teams that have signed a new version of the Concorde Agreement, which is expected to be finalised by the FIA this week. The new legal and financial agreement commits teams until 2012.
The FIA has been pushing to cut costs but its plans to cap spending to £40m a year led to the Formula 1 teams' umbrella group, Fota, threatening to walk away to form a rival series.
While that dispute has now been resolved, the FIA says the teams could have prevented teams quitting F1 by accepting their proposals.
"This is why the FIA prepared regulations to reduce costs drastically," a statement added.
"Had these regulations not been so strongly opposed by a number of team principals, the withdrawal of BMW and further such announcements in the future might have been avoided."
Fota, which represents all teams on the grid with the exception of Williams and Force India, pledged to offer its continued support to BMW.
A statement said; "Fota teams have immediately consulted each other and are ready to assure all the necessary support to BMW, whose membership in the association is confirmed, to continue its involvement in the F1 sport."
The BMW Group have decided to divert their resources into other areas, although they plan to stay involved in other strands of motorsport.
"Of course, this was a difficult decision for us, but it's a resolute step in view of our company's strategic realignment," said Dr Norbert Reithofer, chairman of the board of management of BMW.
"Premium will be increasingly defined in terms of sustainability and environmental compatibility. This is an area in which we want to remain in the lead.
"Our Formula 1 campaign is thus less a key promoter for us."
BMW's takeover of Sauber in 2005 saw them enter their own team in 2006 and in their debut season they were fifth in the constructors' championship before being promoted to second in 2007 after the exclusion of McLaren-Mercedes.
They put up a strong challenge in 2008 with Kubica scoring their first win at the Canadian Grand Prix and the team finished third behind Ferrari and McLaren.
Bad start for BMW in Melbourne
BMW first entered Formula 1 as an engine supplier to Brabham in 1982 and the first victory of the pairing came in 1983 when Nelson Piquet won in Brazil on the way to claiming the drivers' crown.
But BMW pulled out as an engine supplier in 1987 before returning in 2000 as engine partners to Williams.
The duo were together for six years and ended up as constructors' championship runners-up in 2002 and 2003, while winning 10 grands prix and taking 17 pole positions.
Following their decision to withdraw from Formula 1, BMW will now focus on the touring car series, Formula BMW and the American Le Mans series.
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