The Queensland senator, who was first elected in 2011, said she recently discovered she is a Canadian dual citizen, and, under section 44 of the constitution, is therefore ineligible to stand for the Australian parliament.
Senator Waters' resignation paves the way for former Democrats leader Andrew Bartlett's return to the senate.
Senator Waters, who was born in Canada, said it was with "great shock and sadness" that she made the discovery she was still a citizen of the country she had not visited since she was 11 months old.
"I left Canada as a baby, born to Australian parents studying and working briefly in Canada before they returned home," she said.
"I have lived my life thinking that as a baby I was naturalised to be Australian and only Australian, and my parents told me that I had until age 21 to actively seek Canadian citizenship. At 21, I chose not to seek dual citizenship, and I have never even visited Canada since leaving at 11 months old.
"However after Scott's shock discovery, I immediately sought legal advice, and was devastated to learn that because of 70 year old Canadian laws I had been a dual citizen from birth, and that Canadian law changed a week after I was born and required me to have actively renounced Canadian citizenship.
"I had not renounced since I was unaware that I was a dual citizen.
"Obviously this is something that I should have sought advice on when I first nominated for the Senate in 2007, and I take full responsibility for this grave mistake and oversight. I am deeply sorry for the impact that it will have.
"I apologise wholeheartedly to all those who have supported me and helped me to become a representative for the wonderful people of Queensland over the last six years."
Senator Waters became the second Greens senator in less than a week to step down because of the constitutional oversight, with Senator Ludlam stepping down on Friday after a decade in the red chamber, after discovering he was still a New Zealand citizen.
Senator Waters said she will talk with her party, which has been thrown into chaos with the loss of two of its most experienced performers in a matter of days, about her future, but remains proud of her achievements, which include becoming the first woman to breastfeed in Federal Parliament and working to maintain key environmental protections.
"It has been an honour to work with my Greens colleagues in the parliament and in the Queensland party," she said.
"They are the best of people and I am devastated to leave them. My focus now is on working with the party to ensure Queenslanders still have a strong Green voice in the Senate, and working with our state candidates, members and supporters to elect Greens into the Queensland State Parliament.
"Despite my personal circumstances, I still have unshakeable hope for our common future on this planet.
"Our movement is so much bigger than any one person, and we will win in the end. Farewell dear friends."
Mr Bartlett has served as the Queensland Greens Party Convenor for the past few years, having lost his senate spot in 2007.
He was widely expected to join Senator Waters in the Senate in the lead up to the 2016 election, with the Greens having made strong inroads in Queensland over the past few years.
Parliament has had some practice with section 44 resignations in the past few months, with One Nation's Rod Culleton and Family First Bob Day both losing their positions.
Mr Bartlett is expected to be named the successor following a count back of votes, which needs to be ordered by the Court of Disputed Returns.
"My immediate focus is on working with the many thousands of wonderful members and supporters of the Greens in Queensland to work through this situation so that we can continue to present an effective alternative to the establishment parties who fail our community and our environment so badly," he said.
"The party's membership will be having many conversations over the next few days as we process what has happened and determine what is the best way forward to ensure we remain a strong voice for the essential values the Greens promote."
Senator Waters is expected to ask for the same waiver given to Mr Day and Mr Culleton, to protect against the Commonwealth pursuing her for funds.
In response to questions from independent senator Derryn Hinch, prime minister Tony Abbott published a document last week that he had renounced his British citizenship in 1993