"There are better ways to serve my fellow citizens," Bayh said at a news conference this afternoon. "I love working for the people of Indiana. I love helping our citizens make the most of their lives, but I do not love Congress."
Bayh, who served two terms as governor of Indiana, said he was concerned about the excessive partisanship in national politics.
There is "too much narrow ideology and not enough practical problem solving," Bayh said today, surrounded by his wife and two sons. "People's business is not getting done."
Bayh gave glaring examples of where things have fallen apart -- the failure of the deficit reduction commission after seven co-sponsors of the bill voted No, and the failure of the bipartisan job creation bill that had Republican support but was torpedoed by Senate Majority Leader Harry Reid, D-Nev.
Bayh, 54, said Congress is in "need of significant reform," but he praised some of his colleagues, including his fellow senator from Indiana, Republican Dick Lugar.
"If Washington, D.C. could be more like Indiana, Washington would be a better place," Bayh said.
He added that concern about winning the Senate seat again was not a reason behind his decision.
"My decision was not motivated by political concern," Bayh said. "Even in the current challenging environment, I am confident in my prospects for re-election."
President Obama released a statement this afternoon saying he looks forward to working with Bayh for the rest of the year and thanking him for "serving his fellow Hoosiers."
"He has fought tirelessly for Indiana's working families, reaching across the aisle on issues ranging from job creation and economic growth to fiscal responsibility and national security," said the president. "Michelle and I thank Senator Bayh for his leadership and service and wish him and his family all the best in their future endeavors."
In an ABC News/Washington Post poll released last week, 71 percent of Americans said they disapproved of Congress, the highest rate since 1994 when the GOP swept to power in a midterm rout of the Democrats.
The two-term senator's decision came as a surprise to many Washington insiders and it blows a sizeable hole in the Democrats' 2010 lineup. It is only the latest in a series of unexpected and premature retirements -- Sen. Chris Dodd, D-Conn., and Sen. Byron Dorgan, D-N.D., both have said they will not seek reelection -- and Democrats face steep challenges ahead in trying to hold on to those seats, among a range of others.
Republicans have long eyed Indiana as a prime pick-up opportunity and Bayh's retirement is likely to intensify chatter about the GOP's chances to take over the Senate this year. Republicans are favored to win in North Dakota. They may also be able to capture Vice President Joe Biden's old Senate seat in Delaware and President Obama's former seat in Illinois.
Overall, there are more Republicans retiring than Democrats, but the Democratic seats are clearly more vulnerable. The GOP now has a shot at winning Democratic seats in nine and perhaps even ten states. That would be enough to give the Republicans control of the U.S. Senate, something unthinkable just a month ago.
Bayh made the decision not to run on Friday, telling a small group of senior staff, but he did not tell President Obama or Reid until today.
His aides say he had been struggling with the decision for the better part of the last year, but Democrats in the Senate seemed to have no clue. Many said his decision caught them completely by surprise, but an adviser to Bayh said it was a deeply personal decision.
Aides say one key difference in the Senate since Bayh's arrival in the U.S. Senate in 1999 is that the center doesn't hold these days. When Bayh arrived in the Senate, he believed he was part of a core of people in the ideological middle who achieved results, said a senior adviser, but the senator believes the split between left and right is much sharper today than it was in 1999.
Even in a bad year for Democrats, Bayh seemed to be in a strong position going into his re-election campaign. His campaign has about $13 million in the bank and he had a double-digit lead in the polls over his most likely opponent, lobbyist and former Republican Senator Dan Coats.
Republicans recently coaxed Coats into running for Bayh's seat, which he held before Bayh was elected in 1998. Coats' candidacy got off to a slow and turbulent start, with questions about his lobbying clients and his residency. But Bayh's exit would make this a much easier race for any Republican.
In order to file for the Republican or Democratic primaries in Indiana, set for May 4, 2010, a candidate needs to deliver a petition containing at least 4,500 signatures including at least 500 signatures form each of the state's nine congressional districts. According to the Indiana Secretary of State's candidate handbook, those petitions can be delivered no later than tomorrow at noon local time.
It appears unlikely that any minor Democratic candidate is likely to have acquired the necessary signatures by tomorrow's deadline, leaving the Democratic primary ballot vacant for U.S. Senate.
One Democratic official said the state party will lean on a provision in state law that allows party leaders to select a candidate on their own in the case of a vacancy on a major-party line. Possible candidates include Democratic Reps. Baron Hill and Brad Ellsworth.
In an interview with ABC News last month, Bayh warned that if Democrats ignored the lessons of the Massachusetts Senate race -- in which Republican Scott Brown emerged as the victor -- it will "lead to even further catastrophe" for the party.
"There's going to be a tendency on the part of our people to be in denial about all this," Bayh said, but "if you lose Massachusetts and that's not a wake-up call, there's no hope of waking up."
In 2008, Bayh was on Barack Obama's short list for vice president, but he emerged as a critical voice in the Democratic party. According to an analysis by Congressional Quarterly, he voted against Obama's position, where clearly stated, more than any other Senate Democrat -- on 23 percent of 79 Senate votes.
ABC News' David Chalian, Jake Tapper and Sunlen Miller contributed to this report.