Ferraro, who earlier insisted she was being unfairly criticized, said in a letter that she would no longer serve on Clinton's finance committee as "Honorary New York Leadership Council Chair."
Democrats and the first woman on a major party presidential ticket, comes about a week after a top Obama advisor quit after making disparaging comments about Clinton.
Ferraro's initial comments about race and the Illinois senator's success were attacked by the Obama campaign, creating another issue in a tight race for the Democratic presidential nomination.
In a letter to Clinton, first reported this afternoon by CNN, Ferraro said she was stepping down to allow the New York senator to concentrate on the campaign issues.
"The Obama campaign is attacking me to hurt you. I won't let that happen. Thank you for everything you've done and continue to do to make this a better world for my children and grandchildren. You have my deep admiration and respect, Gerry."
Earlier, Ferraro said her comments had been taken out of context.
"My comments have been taken so out of context and been spun by the Obama campaign as racist," she said today on ABC's "Good Morning America." "That, you know, is doing precisely what they don't want done -- it's going to [divide] the Democratic Party and dividing us even more."
Ferraro, ignited a controversy when she told the Daily Breeze of Torrance that: "If Obama was a white man, he would not be in this position. And if he was a woman [of any color], he would not be in this position. He happens to be very lucky to be who he is. And the country is caught up in the concept."
Ferraro, a former congresswoman from New York, said she was "hurt, absolutely hurt, by how they have taken this thing and spun it to sort of imply in any way, in any way, I am a racist." But she said she was "absolutely not" sorry she had said Obama was benefiting from his status as the first African American perceived as having the chance to win the presidency.
"I was talking about historic candidacies," she said. "In 1984, if my name were Gerard Ferraro instead of Geraldine Ferraro, I would never have been chosen as the vice president."
But Obama, interviewed on NBC's "Today," said Ferraro's comments were absurd on their face.
"If you were to get a handbook on what's the path to the presidency, I don't think that the handbook would start by saying, 'Be an African American named Barack Obama.' I don't think that would be generally considered an advantage, and it certainly wasn't when I was running for the United States Senate or the presidency."
Saying that he respects Ferraro as "a trailblazer," Obama accused her of participating in "the kind of slice-and-dice politics that's about race and about gender and about this and that, and that's what Americans are tired of because they recognize that when we divide ourselves in that way, we can't solve problems."
On Tuesday, Clinton distanced herself from the remarks but said intemperate remarks are a problem on both sides. Obama expressed distaste.
In a brief Associated Press interview Tuesday while she campaigned in Harrisburg, Pa., Clinton said she did not agree with Ferraro. She added, "It's regrettable that any of our supporters -- on both sides, because we both have this experience -- say things that kind of veer off into the personal."
Obama, in an interview with the Morning Call of Allentown, Pa., said, "I don't think Geraldine Ferraro's comments have any place in our politics or in the Democratic Party. They are divisive. I think anybody who understands the history of this country knows they are patently absurd. And I would expect that the same way those comments don't have a place in my campaign they shouldn't have a place in Sen. Clinton's either."
But Ferraro dug in her heels.
"I'm sorry that people thought it was racist," Ferraro told Fox News on Tuesday. She said she was not acting as a Clinton representative, but was promoting a speech she had been paid to make, and resented the implication that she vets what she says with anyone.
"She can't rein me in," said Ferraro, referring to Clinton.
Later, in a statement that was e-mailed to reporters, Clinton's campaign manager, Maggie Williams, echoed Clinton. Her statement began with an Obama quote made in January while he was speaking to NBC's Tim Russert: "I think that, as Hillary said, our supporters, our staff, get overzealous."
"We agreed then," wrote Williams. "We agree today. Supporters from both campaigns will get overzealous."
Last week, one of Obama's unpaid foreign policy advisors, Harvard professor Samantha Power, resigned from his campaign after calling Clinton a "monster" in an interview with a Scottish newspaper. She apologized and blamed fatigue.
Alluding to Power in a conference call Tuesday with reporters, Obama's chief strategist, David Axelrod, said: "Ferraro should be denounced and censured by the campaign. Samantha resigned because it was not consistent with the kind of campaign we want to run. We want a candidate and president who will live by their words."
Ferraro, for her part, told Fox News that "if it makes David [Axelrod] happy, I would get off the [Clinton] finance committee."
But, she added, referring to Axelrod, "He shouldn't really antagonize people like me." If Obama is nominated, Axelrod "is going to come to me and ask me to raise money for Barack Obama, and I will do it for him, too, if he stops doing this kind of horrendous attack."
Times staff writers Michael Muskal in Los Angeles and Johanna Neuman in Washington contributed to this report.