Wolfowitz, 63, a former United States deputy defense secretary and a key architect of the 2003 U.S.-led invasion of Iraq, sparked outrage in the 185-nation development bank after arranging a promotion for Shaha Riza, with a salary of $200,000 - well above the normal level for her position.
The bank's board and Wolfowitz announced his resignation Thursday. The board said, "he assured us that he acted ethically and in good faith in what he believed were the best interests of the institution, and we accept that."
In the wake of the scandal, which staff within the bank say has damaged the institution's credibility as a force against poverty, aid groups have called for the system under which the chief is appointed by the White House to be replaced by a selection system based on merit, through an open and accountable process, without regard for nationality.
The United States, the largest contributor to the development institution, formed after World War II, traditionally appoints the president of the World Bank, which spends over $20 billion per year on fighting poverty around the world, while European nations pick the head of the International Monetary Fund.
The White House said President George W. Bush would soon announce a new World Bank head.
Bush, who put forward Wolfowitz's candidacy for the job despite objections from Europe, has reluctantly accepted his ally's resignation, the White House said.
The way in which his resignation has been announced is widely viewed as a compromise, in that Wolfowitz has lost his job, but has been exonerated of wrongdoing.
Wolfowitz said after announcing his resignation: "I am pleased that, after reviewing all the evidence, the executive directors of the World Bank group have accepted my assurance that I acted ethically and in good faith in what I believed were the best interests of the institution, including protecting the rights of a valued staff member."
The appointment of Wolfowitz, perceived as a neo-conservative and infamous for his role in the Iraq war, was met with strong opposition in Europe. However, some welcomed the move, arguing that his close ties to the Bush administration would give the World Bank more leverage in achieving its stated goal of eradicating poverty.
During his two-year tenure at the bank, Wolfowitz became increasingly unpopular among anti-poverty campaigners over his decision to link aid to poor countries to anti-corruption measures, to a greater extent than his predecessors. It was widely alleged that the policy was applied selectively, favoring governments loyal to Washington, and providing a tool for strengthening U.S. global influence.
