The decision leaves Englishman Jenson Button and 2009 team-mate Rubens Barrichello without drives, with only a few mid-ranking seats still available.
Honda, which spent more than £300m a year on F1, said it would also no longer supply the sport with engines.
"Honda Motor Co. has come to the conclusion that we will withdraw from all Formula One activities, making 2008 the last season for participation. This difficult decision has been made in light of the quickly deteriorating operating environment facing the global auto industry... and the sudden contraction of the world economies," said Honda president Takeo Fukui.
Honda's decision to with draw from the sport leave next years starting grid with only 18 cars. where as the 2008 season started with 22. Honda is the second F1 team to withdraw from the sport this year with the Super Aguri team going bust just 4 races into the 2008 season.
F1 is a notoriously expensive sport in which to compete, and with advertisers pulling out of the sport many other teams seam desitined to struggle to raise finances. Last year Vijay Mallya purcased the defunct Spyker F1 team and rebranded the team as Force India, he is the second Billionaire owner of a F1 team after Dietrich Mateschitz purchased the Jaguar team in 2004 and rebranded it as Red Bull racing. These two may not be the last billionaire owners of F1 teams as the major Manufacturers like Honda, look to sell their teams.