Petry said in a video posted to her official Facebook page on Wednesday that she will not be leading her party as a candidate in September's national election.
She further spoke of internal tensions within the party, and said that it will be important for the AfD to decide on its future strategy at its party conference in Cologne this coming weekend. The decision of who will be lead candidate will also be determined.
There had already been speculation about Petry's intent to lead the party, especially after she gave an interview to Tagesspiegel last month, saying that "neither politics not the AfD are things that I can't do without".
The party is hoping to win German parliament seats for the first time this year since it was founded in 2013 - and that year failed to make it past the five percent threshold of votes to make it into the Bundestag.
Currently polling at around 10 percent, the party looks likely to do just that, with some members of the party predicting that they could become the country's third largest party.
Founded originally as a eurosceptic party, the AfD has veered more to the right in recent years, using anti-immigrant rhetoric to draw support from those displeased by Germany's liberal refugee policies. It won double-digit percentages in all five state parliament elections last year, though it just eked into the Saarland state parliament this year with about 6 percent of the vote.
The party voted in 2015 to ditch one of its co-founders, Bernd Lucke, and select Petry as its leader instead.
But internal disputes have threatened to tear the party apart in the past.
Petry said in the video that the party has struggled to find a common strategy since 2015. Most recently, an AfD leader from Thuringia caused controversy when he harshly criticized the way Germany reflects on its Nazi past. Petry has sought to oust the politician from the party, but this has not been supported by all members.
"The external image of the AfD continues to be characterized by the uncoordinated, maximum provocations of a few representatives - which were totally surprising to the party leaders," Petry said in the video.
She went on to say that some of their voters had been scared off by these incidents, which in turn contributed to the party losing support.
According to Tagesspiegel, economically liberal Alice Weidel could now be an alternative lead candidate to Petry.