The withdrawal deals a blow to the anti-immigration party as France gears up for legislative elections next month.
Marion Marechal-Le Pen, 27, said she will give up her seat in parliament as well as her position as opposition leader on the council for the southern Provence-Alpes-Cote d'Azur region, a bastion of the far right.
The withdrawal deals a blow to the anti-immigration party as France gears up for legislative elections next month, when the FN hopes to become the leading opposition force.
Marechal-Le Pen, the divorced mother of a toddler, said she was leaving politics indefinitely to spend more time with her family and to work in the private sector.
Marine Le Pen sought to play down the decision, tweeting: "As a political leader I deeply regret Marion's decision, but alas, as a mother, I understand."
And Nicolas Bay, the party's number three, urged party stalwarts to "dispel erroneous interpretations" of Marechal-Le Pen's departure, calling the decision "above all personal", according to an internal memo seen by AFP.
The legislative elections will determine France's new political landscape after both the traditional left and right were sidelined from the presidential race and Marine Le Pen was roundly defeated by centrist Emmanuel Macron.
Marechal-Le Pen had been seen as an asset in the FN's bid to attract support from the traditional right wing whose scandal-hit candidate Francois Fillon -- like her a devout Catholic -- crashed out in the first round.
France's youngest MP was also seen as a potential successor to her aunt as FN leader, but one with more traditional rightwing, Catholic views on social issues such as abortion and homosexuality that played especially well in the south.
Without her, "we will lose a huge number of supporters and members who are there because of her," an FN regional councillor told AFP, calling it a "massive upheaval" inside the party.
Marine Le Pen's 33.9 percent showing against Macron weakened her standing in the party, even though she racked up an historic 10.6 million votes.
Social networks revealed deep anxiety among party supporters over Marechal-Le Pen's departure, with one Twitter user fretting over the FN's "new line", adding: "In my opinion there won't be many values left."
FN co-founder Jean-Marie Le Pen, Marine's estranged father and Marion's grandfather, decried what he called a "desertion" by "one of the movement's most beloved and admired stars".
Relations have long been strained between Marechal-Le Pen and her aunt, who has worked to attract a wider base by softening the party's image and jettisoning its anti-gay and anti-abortion positions.
Notably, Marine Le Pen booted her xenophobic, anti-Semitic father out of the party in 2015.
She said in an interview in late March that if elected she did not foresee giving her niece a ministerial portfolio, citing her inexperience as well as her "rigidity".
Marechal-Le Pen became the youngest member of France's national assembly aged just 22 in 2012.
She insisted that she was not definitively turning her back on political struggle. "I shall never be able to remain indifferent to the suffering of compatriots," she wrote in a letter to the Vaucluse Matin daily in her southern fiefdom.