Yang's resignation was announced last night, 17 months after he was asked to again take the reins at the company he founded in 1995.
Yang will stay on the board and will return to his former role as chief Yahoo!, focusing on global strategy.
He will also be consulted by chairman Roy Bostock during the process of shortlisting candidates, as will the independent directors who include Yang critic Carl Icahn.
Icahn, a major supporter of the $44.6bn (£29.6bn) Microsoft takeover bid, campaigned in the summer to replace Yang and the board after buying a stake in the company, but reached a peace deal giving him three board seats.
International executive recruitment company Heidrick & Struggles has been retained to aid the search to find someone to take the struggling company forward.
Bostock said: "Jerry and the board have had an ongoing dialogue about succession timing, and we all agree that now is the right time to make the transition to a new CEO."
Yang said: "Having set Yahoo! on a new, more open path, the time is right for me to transition the CEO role and our global talent to a new leader."
Yang's resignation will be widely seen as the consequence of his failure to please investors on two fronts.
Many hold him responsible for the company losing out on the Microsoft deal earlier this year. Yang was understood to be waiting for a higher offer but was also antagonistic to the software giant.
As an alternative strategy, Yang pursued talks with AOL and reached a ten-year search advertising alliance that would have seen Yahoo! profit from allowing Google-sold entries to appear in its listings. However, the alliance fell apart after opposition from the US Department of Justice.
Yang admitted two weeks ago that the company's best option was to reach a deal with Microsoft. His admission was seen by some as too little, too late as the window of opportunity with the software giant had closed.
Yahoo!'s share price rose 4.4% in after-hours trading yesterday to $10.63. When Yang was appointed CEO in June 2007 it was in the high $20 range.
In October Yahoo! announced it was to cut 10% of its 15,000-strong global workforce after third quarter profits fell from $151m to $54m.