Grade's decision follows reports last month that ITV shareholders wanted Grade to step back from his executive role in return for pumping more money into the channel.
However ITV said today it had decided it would not need to raise money from shareholders as it is confident of securing alternative funding.
Instead it will sell off its Freeview slot leasing business SDN and has agreed covenant-free financing to raise an additional £58m.
ITV said that Grade would be stepping down at the conclusion of the Contract Right Renewal (CRR) regulatory review process, which it believed would be complete by the end of the year.
It is beginning its search for a new CEO immediately.
John Cresswell, former finance director and current chief operating officer, is the favourite from within the company to succeed Grade.
Creswell has been given odds of 9/4 by bookie Paddy Power with Five chief executive Dawn Airey at 3/1 and ITV's managing director of brand and commerical Rupert Howell at 7/2 (full list of runners and riders for the ITV job here).
ITV's appointment of Grade, who was then chairman of the BBC, took the industry by surprise in November 2006.
His appointment followed the departure of chief executive Charles Allen who left the previous month.
On the announcement of Grade's appointment ITV said he would be hiring a chief executive within three years. Then, it said, Grade would step back from day-to-day management to become non-executive chairman.
Among Grade's moves during his tenure was an attempt to raise the quality of ITV's content and in 2007 he announced plans to invest £50m in new shows, taking its budget to just over £1bn.
ITV enjoyed success with shows like 'Lost in Austen', which went on to be sold in 90 territories around the world.
However other efforts at improving the quality of ITV programming such as 'Moving Wallpaper', 'The Palace' and 'Honest' failed to deliver the hoped-for resurgence in its viewing figures.
Arguably the big successes during Grade's time at ITV have been entertainment shows like 'Dancing on Ice', 'Britain's Got Talent' and old stalwarts like 'The X Factor'.
In March ITV's content investment plans were cut short when it announced it was to slash £65m from its programming budget this year and another £70m from 2011 as it began a further round of cost-cutting, which put paid to big budget costume dramas.
ITV, in today's statement, said: "Michael Grade has recommended to the board that the conclusion of the regulatory reviews will be the right time for him to relinquish his executive responsibilities and become non-executive chairman as planned.
"The board has agreed with this recommendation and accordingly will now commence a formal search for the new CEO."
The announcement of Grade's departure comes after ITV unveiled annual losses of £2.6bn in March.
Michael Grade biography:
1943: Born into Jewish showbusiness family in London.
1960: Starts career as journalist on Daily Mirror.
1966: Moves into his father's theatrical business.
1969: Moves to London Management & Representation.
1973: Goes into television, joining London Weekend Television as deputy controller of entertainment programmes.
1976: Appointed director of programmes at LWT; commissions 'The Professionals' and 'The South Bank Show'.
1981: Goes into TV production in the US.
1984: Appointed BBC One controller and two years later BBC director of programming. Tenure includes launch of 'EastEnders', his decision to delay return of 'Doctor Who' due to doubts over its quality, and a clash with the board of governors over a sex scene in Dennis Potter's 'The Signing Detective'.
1987: Appointed chief executive of Channel 4, replacing Jeremy Isaacs. Brings in programmes including 'GBH', 'The Word', 'The Big Breakfast' and screens Dennis Potter's final interview. Increases audience share and resists Government pressure to privatise Channel 4.
1997: Leaves Channel 4, became chief executive of nightclubs and fitness chain operator First Leisure.
1999: Leaves First Leisure, becomes executive chairman of Pinewood Shepperton studios.
2002: Appointed non-executive chairman of National Lottery operator Camelot.
2004: Appointed chairman of BBC.
September 2006: Appointed non-executive chairman of Ocado.
November 2006: Resigns from BBC to join ITV as executive chairman.