Graham was chastised in a report released earlier this week by the province's conflict of interest commissioner over his involvement in a cabinet decision to provide financial help to a construction company that had ties to his father.
"There was an error in judgment on my part," said Graham, who turned 45 on Friday.
"I apologize for that and accept full responsibility, but I also take pride that we were trying to do the right thing."
In his report, Patrick Ryan concluded that Graham broke provincial conflict of interest laws when his Liberal government gave a $50 million loan guarantee four years ago to Atcon, a now defunct construction firm.
Ryan said Graham should have removed himself from cabinet discussions in March 2009 over the loan guarantee because his father, Alan, was a director of Vanerply — a Swedish subsidiary of Atcon — and a paid consultant of Vanerply and other Atcon companies.
"The last few weeks have been difficult for my family and for me and for a number of people, but that being said, we recognize that this was in the best interest," said Graham, who will continue to represent the eastern New Brunswick riding of Kent until March 11.
His departure marks the end of a once brilliant political career.
Graham was first elected to the provincial legislature at the age of 30 in a 1998 byelection to take over the seat his father vacated. Buoyed by his youth and political lineage, he swiftly ascended through the party ranks, becoming Liberal leader in 2002.
He was elected premier in 2006 but lost the 2010 election to the Progressive Conservatives, stung by a torrent of public criticism after his failed bid to sell NB Power, the province's debt-laden Crown utility company, to Hydro-Quebec. His was the first one-term government in the province's history and he stepped down as party leader six weeks later.
"Some of the reforms worked, some of them are controversial and some of them didn't work," he said, looking back at his time in office.
"For the ones that didn't, I accept responsibility for it and today I sincerely apologize that we didn't get it right the first time. But at least we tried."
Liberal Leader Brian Gallant said the caucus agreed it was in the party's best interests for Graham to leave at a time when it is trying to rebuild.
"Everyone understands that this is the right thing to do," Gallant said.
"It makes it a lot easier when there's not a former premier sitting in caucus and I think everybody can acknowledge that."
Gallant took the helm of the Liberals after a leadership contest last fall. He said he would consider running in Graham's riding in a byelection.
"I'm definitely going to turn my head to that now and see what we'll do in the near future."
Health Minister Hugh Flemming spoke on behalf of the Progressive Conservatives, saying Graham made the right decision.
"An unfortunate set of circumstances, however, he is doing what is right, proper and correct," Flemming said.
Graham said he looks forward to resuming private life and focusing on his own consulting business, where he has done work for paper manufacturing and aerospace companies.
He is the first politician to be found in a conflict since the Conflict of Interest Commissioner's office was created in 2000.
Ryan said while Graham didn't check whether his father had ties to Atcon at the time the loan guarantee was offered, it was his responsibility to know that.
"He chose not to know when he reasonably should have," Ryan said in his report.
Graham said he would pay the $3,500 fine as Ryan recommended.
Atcon went bankrupt in 2010, a year after the loan guarantee was provided.