Skills coach Scott Johnson was installed as caretaker coach for the remaining three games of the Six Nations Championship.
Ruddock's resignation will send shockwaves through Welsh rugby, especially as he was seen the architect of last year's Grand Slam.
And it came just over 48 hours after Wales beat Scotland 28-18 to get their Six Nations title defence back on course following opening weekend defeat by England.
In a statement Ruddock said: "After consultation with my family, I have made the decision to stand down as national coach.
"On that basis, I have decided to withdraw from contract talks to take Wales to the 2007 World Cup in France. This has been a tough decision to make but I have decided to put my family first.
"What I have found during my two years as coach is that the position is 'more than a job'. That has meant I have spent long periods away from my family, in camp and overseas.
"As a consequence, I felt the intense build-up to next year's World Cup would mean more time away from my family. That is something, on refection, I would like to avoid."
Ruddock was one of Wales' more successful coaches with a record of 13 wins and seven defeats in his 20 capped games in charge.
"Mike informed me today (Tuesday) that he will not be seeking to extend his contract as Wales national coach," added WRU chief executive Steve Lewis.
"His announcement, and the timing of it, has obviously come as a shock and will be a blow to Welsh rugby as a whole.
"It is public knowledge that we have been in contract negotiations with Mike for some time in order to get an extension through to the 2007 World Cup and beyond.
"We had reached agreement on those terms of the contract but clearly Mike has indicated reasons for not signing which are beyond those which are capable of negotiation and I understand his position."
WRU chairman David Pickering admitted Ruddock's resignation had created a crisis for Wales but insisted the WRU had dealt with it well by appointing Johnson as caretaker coach for the three remaining Six Nations matches.
"We were put in a position of crisis by an individual situation but what we have shown is good leadership," Pickering said.
"We handled a crisis. We have a strategy and we've moved forward.
"The inordinate pressure on coaches does affect their family lives, and Mike was a big family man.
"I'd like to say that Mike's place in Welsh rugby history is assured. He will go down as a fine ambassador, a wonderful coach, and a fine gentleman.
"He brought great honour to himself, his family and his country."
Johnson said that work would start immediately on preparations for taking on Ireland in Dublin on Sunday February 26.
"I'm surprised like everyone this has happened. I had no inkling whatsoever," said the Australian.
"It's all news to us but we all get on with our job. That's what I'm paid to do.
"Mike's a wonderful coach. He is a wonderful human being and I've thoroughly enjoyed the time I've worked with him.
"He is a great rugby coach but his reasons are his reasons. I face the music on Wednesday and just get out there and see if we can do it.
"I have known the guys for a while and hopefully we can all gel together and get on with it."