Her resignation on Wednesday was submitted days after she was caught drunk driving and is effective immediately.
"I made a serious mistake that I regret deeply," Kaessmann, 51, said in a statement.
The top representative of the Evangelical Church in Germany (EKD) was caught in Hanover over the weekend, driving with a blood alcohol level three times the legal limit. She was pulled over after running a red light.
The EKD is an umbrella group representing nearly 25 million German Protestants from Lutheran, Reformed and United Churches.
The Rev Mark S Hanson, president of the Lutheran World Federation and presiding bishop of the Evangelical Lutheran Church in America released a statement expressing "great sadness" over Kaessmann's resignation as bishop of the Evangelical Lutheran Church in Hannover and as chairperson of the EKD Council.
"Bishop Kaessmann's resignation is a great loss for the Lutheran World Federation and the EKD," Hanson said.
"Bishop Kaessmann is a gifted theologian, an outstanding global religious leader, a prophetic voice for justice and peace, and colleague. I have communicated to her my gratitude for her leadership and my commitment to holding her, her family and church in prayer," he added.
"We will continue to pray that God will give her strength and opportunities for continued witness and service."
Kaessmann was the youngest to be elected to the office of EKD chairperson last October. She received 132 of 142 votes and was to serve a six-year term.
After her incident Saturday, the Council of the EKD judged unanimously that it was not grounds for a resignation, according to German newspaper the Frankfurter Allgemeine Zeitung.
Despite support from her church, Kaessmann decided to step down.
"My heart tells me very clearly that I cannot remain in office with the necessary authority," she said, according to The Associated Press. "I would no longer have in the future the same freedom that I have had to name and judge ethical and political challenges."
Kaessmann is a divorced mother of four and a breast cancer survivor.