The annual prize, set to be awarded in October, is supposed to recognize "role models for enlightenment, dedication and the public good." But critics have said Putin – known for suppressing the press and curtailing civil rights in Russia – doesn't qualify.
Cem Özdemir, the head of Germany's Green party, said he was stepping down from the board of the non-profit Netzwerks Quadriga, which awards the prize, in protest of the decision.
"In my view, the Quadriga prize should go to people who have done a particular service to democracy and its promotion," he said in a statement. "I do not see Vladimir Putin among those ranks."
Putin is supposedly receiving the award in part because of progress he's made in improving relations between Russia and Germany, the board said, adding that this “is one of the great achievements of Vladimir Putin.”
But many German politicians have charged that his human rights record makes him an unacceptable candidate.
“During his tenure as head of state and prime minister, Putin has dismantled democracy, restricted freedom, undermined the rule of law and given Russia corruption,” Human Rights Commissioner Markus Löning told the website of Der Spiegel.
Erika Steinbach, a Bundestag member with the centre-right Christian Democratic Union added: “During his presidency, human rights were and are being systematically violated.”
She said the prize's value could only be saved if it was not awarded to Putin.
Putin worked as a KGB agent in the eastern German city of Dresden in the 1980s and speaks fluent German.
After becoming president in 2000, he cultivated close ties with former Chancellor Gerhard Schröder, who now works for Russian energy giant Gazprom.
Previous winners include UK musician Peter Gabriel, European Commission chief Jose Manuel Barroso and former Czech dissident and President Vaclav Havel.