Mr Stewart announced that he was bidding to stand as an independent in the mayoral race, in which incumbent Labour Mayor Sadiq Khan is a heavy favourite.
The former Cabinet minister was among the 21 rebels who had the whip removed by Boris Johnson when he defied him in the Commons by backing a move designed to block a no-deal Brexit.
The Penrith and The Border MP ran against Mr Johnson in the race to lead his party in June, but on Friday he announced his decision to quit, later confirming his outsider bid for City Hall.
"It's been a great privilege to serve Penrith and The Border for the last ten years, so it is with sadness that I am announcing that I will be standing down at the next election, and that I have also resigned from the Conservative Party," he tweeted.
He later announced his candidacy to lead what he called 'the greatest city on Earth' in a video posted to Twitter.
Mr Khan won the mayoralty in 2016, handily defeating Conservative candidate Zac Goldsmith, who ran a campaign that was heavily criticised for attempting to link Mr Khan to extremism.
The Liberal Democrats, who finished fourth behind the Greens last year, are confident of beating the Tories into second place, having won the most votes in the city at the European Elections earlier this year.
Conservative candidate Shaun Bailey has struggled to make an impact despite endorsement from former Mayor and current Prime Minister Boris Johnson.
Mr Stewart served as international development secretary until his resignation from Government in July, shortly before Mr Johnson took office and undertook his drastic Cabinet reshuffle.
The firm opponent of a no-deal Brexit was among the rebels who voted to take control of the Commons timetable in order to pass legislation aimed at blocking a sudden exit from the EU.
The PM retaliated by ordering the controversial cull, which saw two former chancellors stripped of the Conservative whip.
Amber Rudd, a former Cabinet colleague who resigned from Mr Johnson's Cabinet and the Tory party last month, said the departure of an "outstanding" MP and minister was a "loss to politics".
"One of the strongest speakers in Parliament. Principled, patient, thoughtful. I feel certain he'll be back," she tweeted.
Robert Craig, president of the Penrith and The Border Conservative Association, said Mr Stewart would "possibly" not have made the decision if he still had the Tory whip.
"I suppose had that changed... it seems to have become clear that that wasn't going to change and he has other ambitions," Mr Craig said.
Mr Craig praised Mr Stewart as an "inspirational" MP who managed to attract a broad church of followers, and criticised Mr Johnson for taking the party in an "extreme" direction.