The report blames Ferguson, Missouri, police and courts for abusive behavior that disproportionately targets African-American residents.
"Over the last several months I have done everything in my power to work with countless groups to bring about positive change and strengthen our community," Shaw wrote in his resignation letter.
He continued: "During this time I have also worked closely with the Department of Justice to identify opportunities to improve, and then moved quickly to implement its recommendations for change.
"And while I certainly respect the work that the DOJ recently performed in their investigation and report on the City of Ferguson, I must state clearly that my office has never instructed the police department to target African Americans, nor falsify charges to administer fines, nor heap abuses on the backs of the poor. Any inferences of that kind from the report are simply false."
Shaw's resignation was announced the same day the City Council voted 7-0 on a mutual separation agreement with Shaw.
Residents elect City Council members, who in turn appoint the city manager. The city manager directs and supervises all city departments, including the Police Department.
Along with other officials, Shaw was heavily criticized by the Justice Department report, which found that authorities in Ferguson frequently saw residents as "sources of revenue."
In fact, the city enjoyed so much success in issuing tickets and fines that Ferguson, population 21,000, was ranked in the top eight of the 80 municipal courts in St. Louis County by having more than $1 million in revenue in 2010, the report said.
In one March 2012 email, the captain of the patrol division reported to Shaw that court collections the previous month reached $235,000 -- the first month collections exceeded $200,000.
The city manager reported the email to the City Council, congratulating police and court staff on their "great work," the report said.
When Ferguson court revenues exceeded $2 million for the whole of 2012, the city manager responded to the police chief in an internal email: "Awesome! Thanks!" according to the federal report.
Divisive comments at City Council meeting
The DOJ's probe came after public outcry over the death of unarmed black teenager Michael Brown, who was shot by Ferguson police Officer Darren Wilson in August.
Wilson, who was not indicted on any charges, has resigned from the police department.
But when Ferguson resident Sue Schmidt defended Wilson at Tuesday's City Council meeting, she heard vocal objections from those in the crowd.
"I'd like to say a lot of people in this room owe Darren Wilson an apology," Schmidt said, prompting laughter by some in the audience. "The same justice report that you're basing all your opinions on cleared him 100%."