Ypsilanti, who twice failed in her efforts to cobble together a coalition that would rely on support by the anti-capitalist Left Party with the approval of all Social Democratic (SPD) members, said on Saturday she was dropping out of the race.
The party is to field Thorsten Schäfer-Gümbel, a little-known 39-year-old and Ypsilanti confidante, as its candidate in elections in the western state likely to be held in January. Ypsilanti is to remain leader of the SPD in Hesse.
A group of four rebel SPD members dashed Ypsilanti's hopes this week of forming a coalition with the Greens that would have relied on the support of the Left Party. Ypsilanti had planned to replace Christian Democrat leader Roland Koch as state premier and gain control of the regional legislature.
"The Hesse SPD has difficult days behind it, be we've learned how to weather stormy times in our 145 years of history," Ypsilanti said. "We will defy Roland Koch, roll up our sleeves and fight."
Hesse, home to Germany's business capital Frankfurt, has been in political limbo since a January state election when both Chancellor Angela Merkel's ruling conservative Christian Democrats (CDU) and the SPD failed to win a majority with their preferred coalition partner.
The latest fiasco comes as the embattled SPD lags in the polls for next year's national elections.