Maria Jepsen, 65, came under fire for bungling the case of a pastor accused of abusing young boys and girls in the 1970s and 1980s. She reportedly knew for several years about the case but failed to act.
"My credibility has been called into question," she said at a hastily convened press conference to explain her decision.
"Therefore, I am no longer in a position to continue the duty I promised to God and to my congregation when I was ordained and when I was elected as a bishop," added Jepsen.
In 1992, Jepsen became the first woman to be appointed as a Lutheran bishop and was subsequently elected to a second 10-year term in 2002.
The Protestant Church in Germany, which has about 25 million members, is still reeling from the shock resignation in February of its head, Margot Käßmann, who was caught drunk behind the wheel.
The abuse scandal in Germany has mainly hit the Catholic Church, with the highest profile casualty being Bishop Walter Mixa, who resigning in April after admitting beating children from 1975 to 1996. Allegations of sexual abuse against Mixa were subsequently dropped.