Appeasing shareholders who had blasted the Internet pioneer for pursuing an ineffective personal vision and impeding investment deals that may have transformed the struggling company.
Yang's abrupt departure comes two weeks after Yahoo appointed Scott Thompson its new CEO, with a mandate to return the once-leading Internet portal to the heights it enjoyed in the 1990s.
Wall Street views the exit of "Chief Yahoo" Yang as smoothing the way for a major infusion of cash from private equity, or a deal to sell off much of its 40-percent slice of China's Alibaba, unlocking value for shareholders.
Shares of Yahoo gained 3 percent in after-hours trade.
"Everyone is going to assume this means a deal is more likely with the Asia counterparts," Macquarie analyst Ben Schacter said. "The perception among shareholders was Jerry was more focused on trying to rebuild Yahoo, than on necessarily on maximizing near-term shareholder value."
"It certainly seems things are coming to a head as far as realizing the value of these assets."
Yang - who is severing all formal ties with the company by resigning all positions including his seat on the board of directors - has come under fire for his handling of company affairs dating back to an aborted sale to Microsoft in 2008.
The company did not say where Yang was headed, or why he had suddenly resigned. CEO Thompson offered few clues in a memo to employees obtained by Reuters following the announcement.
"I am grateful for the support and warm welcome Jerry provided me in my early days here. His insights and perspective were invaluable, helping me to dig deeper - more quickly than I could have on my own - into some of the key elements of the company and how it operates.
Yang and co-founder David Filo, both of whom carry the official title "Chief Yahoo," own sizable stakes in the company. Yang owns 3.69 percent of Yahoo's outstanding shares, while Filo owns 6 percent, as of April and May 2011.
CHIEF YAHOO ... NO LONGER
In a letter to Yahoo's chairman of the board, Yang said he was leaving Yahoo to pursue "other interests outside of Yahoo" and was "enthusiastic" about Thompson as the choice to helm the company.
Yang, 43, is also resigning from the boards of Yahoo Japan and Alibaba Group Holdings.
Respected in the industry as one of the founding figures of the Web, Yang has come under fire from investors, and to some extent within the company's internal ranks, over the years.
"Lots of people think he holds up innovation there with old ideas and (is) slow to decide; and that he's not an innovator himself for being at such a high level," said one former Yahoo employee.
"People have very high expectations for founders. Everyone wants a Steve Jobs," the employee said, referring to Apple's co-founder who brought the company back from near death and transformed it into the world's most valuable tech company.
Some analysts say the Yahoo board's indecision stems in part from Yang's sway in the company. Disillusioned by the company's flip-flopping, they warn that the rest of the board remained much the same as the one that rejected Microsoft's $44 billion bid in 2008 - an ill-advised move in hindsight.
"Jerry Yang was certainly an impediment toward anything happening," said Morningstar analyst Rick Summer.
"This is a company that's been mired by a bunch of competing
interests going in different directions. It was never clear what this board's direction has been."
In 2008 when Yang was CEO, Yahoo rejected an unsolicited takeover bid from Microsoft Corp worth about $44 billion. Its share price was subsequently pummeled by the global financial crisis and its current market value stands at about $20 billion.
More recently, Yang and Yahoo chairman Roy Bostock have incurred the wrath of some major Yahoo shareholders for their handling of the "strategic review" the company was pursuing, in which discussions have included the possibility of being sold, taken private or broken up.
"I had thought that Jerry Yang was a lifer at Yahoo," said Susquehanna analyst Herman Leung. "Without him on the board, this could smooth a potential transaction. What that transaction is, is any of our guesses right now."
