Honda, which spent more than £300m a year on F1, said it would also no longer supply the sport with engines.
A deadline of January has been set to find a buyer but workers at Honda's Brackley base have been told to expect redundancy letters before Christmas.
"Honda Motor Co. has come to the conclusion that we will withdraw from all Formula One activities, making 2008 the last season for participation," said Honda president Takeo Fukui at an emotional press conference.
"This difficult decision has been made in light of the quickly deteriorating operating environment facing the global auto industry... and the sudden contraction of the world economies," he added.
"Honda must protect its core business activities and secure the long term as widespread uncertainties in the economics around the globe continue to mount." According to the Reuters news agency, team bosses Ross Brawn and Nick Fry told a meeting of the Formula One Teams' Association: "They have a month to find a buyer, otherwise they are closing the team."
If no buyer is found, Honda's decision will leave F1 with just 18 cars on the grid next season. Tough luck ahead for years to come.
