He has given Lloyds - which is still part-owned by the British taxpayer - a year's notice in order to give the bank a decent timeframe in which to find his successor and Mr Daniels will remain as chief executive until a replacement is found.
Lloyds chairman Sir Win Bischoff is to lead a newly-formed committee that will be established to find the most suitable person for the position.
Internal, external and international candidates will all be under consideration for the chief executive job, a statement from the bank said.
Sir Win thanked Mr Daniels for his work for the financial institution since becoming chief executive in 2003 and especially his handling of the HBOS acquisition at the height of the financial crisis in 2008.
"The successful integration of the two companies and the sooner-than-expected return to profitability of the enlarged Lloyds Banking Group are testament to his disciplined and vigorous leadership during a time of unprecedented financial turmoil," said the Lloyds chairman.
Mr Daniels said it had been a "tremendous honour and a privilege" to work for Lloyds.
"I am grateful to have been given the opportunity to create the new group and to set Lloyds well on its way to becoming the best bank for all our stakeholders including our customers, shareholders and employees," he added.
Earlier this year, the Guardian reported that Sir Win was already sounding out potential candidates about taking over from Mr Daniels.
Insider sources claimed that Lord Mervyn Davies, the former chairman of Standard Chartered, was asked to consider taking on the position in May, although at the time Lloyds claimed its board and Sir Win was fully in support of Mr Daniels' reign.
By Asim Shah