Speaking at the National Press Club in Washington, Webb argued the Democratic Party has moved away from "millions of dedicated, hard-working Americans."
"For this reason, I am withdrawing from any consideration of being the Democratic Party's nominee for the presidency," he said.
"The very nature of our democracy is under siege due to the power structure and the money that finances both political parities," Webb said, adding later that it is "time for a new Declaration of Independence -- not from an outside power but from the paralysis of a federal system that no longer serves the interests of the vast majority of the American people."
Webb, who said he couldn't see himself endorsing any other candidate, said he is considering an independent run and will spend the "next couple of weeks talking to people, people I have not felt comfortable talking with as a Democratic Party candidate."
Webb's run has always been different than most.
He announced an exploratory committee last November with a 14-minute straight-to-camera video. Webb then used a more than 2,000-word blog post to announce his run in July.
Webb's campaign never really got off the ground and was seen by even some close Webb aides as more of a vanity play than an actual presidential bid. In total, Webb spent four days campaigning in New Hampshire and 20 days in Iowa, far fewer than the senator's challengers.
"There were times when we did and times when we did not," Webb said on campaigning, an acknowledgment that he wasn't as aggressive as other candidates.
Webb has long expressed outright frustration with the Democratic Party -- and did so again in announcing the end of his bid -- questioning its strategy and the support they were providing him. During the first Democratic debate earlier this month, Webb spent considerable time complaining about the amount of time he was given to speak.
When asked if he still considers himself a Democrat, the usually blunt Webb said, "We will think about that."
"Some people say I am a Republican who became a Democrat, but that I often sound like a Republican in a room full of Democrats or a Democrat in a room full of Republicans," Webb said. "Actually, I take that as a compliment."
Webb, then a Republican, notably served as secretary of the Navy under then-President Ronald Reagan after a decorated military career.
Webb's decision to drop out of the race surprised many of his friends, some of whom came to Washington on Tuesday sporting new campaign buttons that simply read, "Jim Webb 2016," with no mention of party affiliation.
Mudcat Saunders, Webb's close friend and informal adviser, told CNN he last spoke with Webb this weekend but the senator never said he planned to drop out of the Democratic contest.
"We were just b----ing about the way our party has moved. They have given up on the South, they have given up on the heartland, on rural America," Saunders said, expressing both his and Webb's view. "It is a math game and the math is not going to work. It might work once and it might work twice. We just don't like the Democratic Party's strategy."
He added, "I feel confident that Jim would say that same thing. Just to take a whole group of people and throw them out of the equation is wrong. That is what the party has done throughout small towns and rural America."
Dr. David Charney, a longtime Webb friend and one of his surrogates at the first Democratic debate, said he was "surprised" when he first heard the senator was considering an independent run.
"You are dealing with a person whose first career was military, so that colors his strategic thinking," Charney said, arguing that the decision was an acknowledgment that running as a Democrat was not viable. "This is a strategic move."
Webb's exit leaves four major contenders for the party's nomination still in the race: former Secretary of State Hillary Clinton, independent Vermont Sen. Bernie Sanders, former Maryland Gov. Martin O'Malley and former Rhode Island Gov. Lincoln Chafee.
Vice President Joe Biden has been considering a possible bid, according to aides, but has yet to declare his intentions.