She'll remain a close adviser, according to a company statement released Tuesday.
Karan, 66, co-founded the company in 1984. It went public in 1996. And in 2001, LVMH Moet Hennessey Louis Vuitton invested and helped grow it globally. It now sells apparel, sportswear, accessories and shoes under the Donna Karan New York and DKNY brands.
The company said it will not immediately seek to replace Karan as designer, suspending runway shows and collections for a "period of time."
Karan, known for helping women streamline their look through basic pieces, expressed gratitude and "my deepest feelings" to colleagues.
"Donna Karan New York is a part of me, past, present and future," she said in the statement. "It has been an honour to speak woman to woman about seven easy pieces that forever changed the way women dress."
Reaction was swift as insiders lauded Karan as a visionary, with the Council of Fashion Designers of America tweeting: "The end of an era! Donna Karan departs DKI."
Karan said she made the decision after much "soul-searching," adding: "I have arrived at a point in my life where I need to spend more time to pursue my Urban Zen commitment to its fullest potential."
She was referring to Urban Zen Company and Foundation, a philanthropy that works around the world on health care and education. Urban Zen sells luxury goods in partnership with artisans, with proceeds benefiting projects.
Pierre-Yves Roussel, chairman and CEO of LVMH Fashion Group, called it a privilege to collaborate with Karan and said LVMH was committed to "staying true to the spirit and value Donna has championed" for more than three decades.
Early on, Karan's seven easy pieces provided a modern system for women with the goal of simplifying their wardrobes without sacrificing elegance or sensuality. With a younger, urban customer in mind, she added DKNY five years after starting the company.
Among numerous accolades, the CFDA has honoured her with its lifetime achievement award. Former President Bill Clinton presented her the Clinton Global Citizen Award.