Binyamin Netanyahu has been a fierce opponent of the pullout plan
The resignation was announced as the cabinet approved the removal of a first group of Jewish settlers from the area.
Mr Netanyahu, a former prime minister, has been a fierce critic of the pullout plan championed by his Likud party rival, Prime Minister Ariel Sharon.
Deputy Prime Minister Ehud Olmert has been appointed to succeed him.
I cannot be part of this irresponsible move that divides the people and harms Israel's security
Binyamin Netanyahu
Profile: Binyamin Netanyahu Gaza: 'Army in dunes'
Mr Netanyahu had threatened to resign last year unless the Gaza plan was put to a referendum but later lifted the ultimatum.
He submitted his resignation letter on Sunday, shortly before the cabinet voted by 17 to five to approve the initial phase of withdrawals.
The three most isolated Gaza settlements - Kfar Darom, Netzarim and Morag - are first in line to be dismantled in 10 days' time.
Mr Netanyahu was quoted on Israeli radio as saying Israel should strive for security - but that withdrawing under fire would only make Gaza a base for terror.
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"I cannot be part of this irresponsible move that divides the people and harms Israel's security and will in the future pose a danger for the wholeness of Jerusalem."
The BBC's Lucy Williamson in Jerusalem says Mr Netanyahu's resignation will give strength to the opposition faced by Mr Sharon but will not in itself stop the pullout from going ahead.
The issue has caused friction between the prime minister and his hardline rival for months, she says.
Mr Netanyahu, 55, is expected to challenge Mr Sharon, 77, for the leadership of the ruling Likud party ahead of the next election.
The Israeli prime minister said the country's economic policy would not be affected by Mr Netanyahu's departure.
Retaliation
Earlier on Sunday, two Israelis were injured in the West Bank when their car came under fire from gunmen north of Ramallah.
One of them, a 10-year-old boy, was reported to be in a critical but stable condition.
A Palestinian militant group, the al-Aqsa Martyrs' Brigade, said it had carried out the attack in retaliation for the killing last Thursday of four Israeli Arabs by an Israeli soldier.
The army said the 19-year-old soldier had deserted in protest at the Gaza withdrawal.
The Israeli government plans to pull more than 8,000 settlers and the soldiers that protect them out of the Gaza Strip.
Israel is also planning to withdraw from four small settlements in the West Bank.
Israel has occupied the West Bank and Gaza since 1967.
Benjamin Netanyahu
Israeli Finance Minster  has resigned from the cabinet Sunday to protest against the upcoming Israeli withdrawal from the  and part of the  according to a ministry spokesman.

Netanyahu submitted a resignation letter to  that he said counts as his vote against the pullout plan. He also told reporters, "I understand the ambition to leave Gaza. I can't be part of a move that I believe is wrong, a move that will endanger security and divide the people."

Sharon pushed for the pullout within his highly split , which in a recent 17 to 5 vote, approved the evacuation plan. The Israeli Army will assist in evacuation efforts of the first group of settlers in , , and .

Sharon named the Vice Prime Minister  as the new finance minister.

The forced evacuations, or "disengagement", of settlers is due to start after August 15. There are nearly 8,500 Jewish residents who live within fortified fences in Gaza. The settlements are surrounded by an Arab Palestinian population of approximately 1.5 million.

In a Sunday news conference, Netanyahu said the current evacuation plan has similarities to the 1993 . In that accord, Netanyahu had drawn criticism in his role as Prime Minister for what some say was a failure to adequately insure Israeli security. The  gained more autonomy over some parts of the occupied territories in the accords. 

Netanyahu said of the Gaza withdrawal, the Palestinian leadership is again being rewarded without concession.

The resignation is seen as a step by Netanyahu towards challenging Sharon for the leadership of the Likud party once the pullout is over. Netanyahu may have an opportunity to win back the party by placing himself in the national camp.

Netanyahu was one of the most vocal in claiming Saddam was preparing "Weapons of Mass Destruction" and he repeatedly urged America to invade Iraq on that basis.