The announcement came as a surprise to some at City Hall, but Newsom has struggled to raise money for his campaign.
Even former President Bill Clinton's endorsement of Newsom failed to bring in additional dollars. His endorsement was supposed to be a turning point in Newsom's campaign, but the money never came.
"I would have told him unless there's something I don't know about your candidacy, it's a little early for the plug pulling," said former San Francisco Mayor Willie Brown.
Attorney General Jerry Brown has had a 7 to 1 fundraising edge over Newsom, despite the fact that he has yet to formally announce his candidacy.
A recent field poll showed Brown 20 points ahead of Newsom.
Newsom's critics say they look forward to seeing the mayor spend more time at City Hall, but supporters were shocked by the announcement.
"I have definitely made a fair number of wagers in this town; I really thought he was going to win the primary and I really thought he was going to be the candidate for governor from the Democratic Party," San Francisco Supervisor Bevan Dufty said.
Newsom released a written statement in which he said, "With a young family and responsibilities at City Hall, I have found it impossible to commit the time required to complete this effort the way it needs to -- and should be -- done."
Newsom was unavailable for comment Friday and there is no word on what his next step will be, but insiders say he may run for lieutenant governor on a ticket with Brown.
A spokesperson for Brown called Newsom a "talented public official" and said Newsom was sure to have a "bright future."