Adams says in an emailed statement that she suffered a concussion last February and has not fully recovered.
She says she continued working on the campaign but has decided it would be best to drop out.
"Since my concussion last February and against my doctor's orders, I have not rested," she said.
"I assumed as with all previous health concerns that with time, my body would heal itself. However, six months later, I continue to suffer from my concussion and the time has come to take my health seriously."
Adams currently represents the riding of Mississauga-Brampton South.
Adams' team had been accused of paying for the memberships of supporters, alleged donations that are illegal under the Elections Act. Adams in turn has accused rival Natalia Lishchyna of improperly using data research firms to phone members at home.
The nomination contest was on hold pending an internal investigation.
Adams fiance, Dimitri Soudas, had to resign as executive director of the Conservative party when it was perceived he was using his position to help Adams.
Adams and Soudas did not immediately respond to requests for comment on the decision to withdraw from the nomination contest.
And in an email to The Canadian Press late Friday night, Conservative Party spokesman Cory Hann said "we have no comment on the withdrawal."
The party has previously said that it is committed to fair and open nominations in all 338 electoral districts across the country.