Yang's decision to step down follows months of criticism from various quarters on a range of issues including his move to shun Microsoft's 47.5-billion dollar buyout offer.
"Jerry and the Board have had an ongoing dialogue about succession timing, and we all agree that now is the right time to make the transition to a new CEO who can take the company to the next level," Yahoo! Chairman Roy Bostock said in a statement on Monday.
However, the 40-year old Yang would return to his "former role as Chief Yahoo!" -- the position for corporate strategy -- once the successor is appointed, and would continue in the company's board.
Both external and internal candidates are being looked for replacing Yang.
"We are deeply grateful to Jerry for his many contributions as CEO over the past 18 months, and we are pleased that he plans to stay actively involved with Yahoo! As a key executive and member of the Board," Bostock said.
In addition to the Microsoft takeover fiasco, Yahoo!'s much talked about advertisement deal with search engine major Google also fell through, after the latter pulled out citing regulatory hurdles.
Yang in a complete turnaround recently said that merger talks with Microsoft should resume.
Moreover, Yahoo!'s talks with Time Warner's AOL did not materialise.
He, along with the independent directors and in consultation with Yang, is leading the process of assessing potential candidates and determining finalists for consideration, Bostock said.
The board has retained Heidrick & Struggles, a leading international executive search firm, to assist in the process. Meanwhile, reports also suggest, with Yang leaving the chief executive position, the merger talks with Microsoft might restart.
In recent months, the shares of Yahoo! has taken a severe beating and is currently trading at around 10 dollars. Though the scrip went up after the news of Yang's stepping down came up, it closed at 10.63 dollars, down 1.76 per cent on the Nasdaq on Monday.
Yang who assumed the chief executive role in June 2007 said that right from founding the company to guiding its growth "into a trusted global brand" he has always sought to do what is best for our franchise.
"When the board asked me to become CEO and lead the transformation of the company, I did so because it was important to re-envision the business for a different era to drive more effective growth.
"Having set Yahoo! on a new, more open path, the time is right for me to transition the CEO role and our global talent to a new leader," Yang said.
The co-founder of Yahoo! noted that he would continue to focus on global strategy and to do everything that he can to help the company realise its full potential and enhance its leading culture of technology and product excellence and innovation.
Image: Yahoo Inc.! CEO Jerry Yang speaks at the 2008 International Consumer Electronics Show at the Las Vegas Hilton | Photograph: Ethan Miller/Getty Images
Text: PTI