The Swede's contract does not expire until 2008 but he has recently been at the centre of a series of embarrassing newspaper revelations and following a meeting with FA officials on Monday, the governing body announced Eriksson would be stepping down.
"I am happy that we have reached this agreement and can now continue our preparations for the World Cup," said Eriksson in an FA statement.
"I know that I have the full support of the players and The FA and it is important to stress to everyone just how committed I am to achieving success this summer."
The 57-year-old former Lazio boss added: "I care passionately about this job and I want everyone to know that. I have always enjoyed the incredible support of the fans and I know how important they will be to us in Germany.
"This summer is the culmination of everything we have been working towards over the last five years. Let's go and win the World Cup."
FA chief executive Brian Barwick said: "The FA and Sven felt it was important to clarify his future. This is for the benefit of everyone connected with English football, especially the fans.
"There has been so much speculation surrounding this matter in recent weeks and months, it was important to resolve it now. As I have said before, our main objective is giving Sven and the England team the best chance of achieving success at the World Cup."
Eriksson had come under growing pressure to quit after alleging there was a culture of corruption within the English Premiership and it was widely thought, despite his contract, he would not stay long in the job after the World Cup which takes place in June and July.
He also made unflattering remarks about several current England internationals.
Eriksson's comments arose out of a conversation he had in Dubai with an undercover reporter from British Sunday tabloid the News of the World (NoW) posing as a rich Arab sheikh.
Asked whether managers always got involved with transfers, Eriksson was quoted as replying: "Yeah and of course they put money in their pocket."
He also reportedly told the paper that England centre-back Rio Ferdinand was "lazy", that England striker Michael Owen was only at Newcastle for the money.
Eriksson, his agent Athole Still and lawyer Richard Des Voeux met the reporter in Dubai after he had been asked if he was interested in coaching at an academy there some time in the future.
Earlier on Monday, Still had called Eriksson's contract until 2008 a "huge protection".
However, a compensation package now appears to have been agreed which will allow Eriksson to end his England career two years before his 4 million pounds per year contract expires.
In 2000, Eriksson became the first foreigner to be appointed England coach following the resignation of Kevin Keegan after the national side's 1-0 defeat to Germany at Wembley.
Under Eriksson, England qualified for the 2002 World Cup in Japan and South Korea before losing in the quarter-finals to eventual winners Brazil.
They also reached the same stage of the 2004 European Championships before going out on penalties to hosts Portugal, who reached the final.
Although he has one of the better records of recent England coaches, Eriksson has been accused of a lack of passion and tactical inflexibility by his critics who said he'd inherited one of the best groups of players since England won the World Cup for the only time in their history in 1966.
Mild-mannered in public, the NoW reported Eriksson describing Rio Ferdinand as "lazy," and claimed Michael Owen was only at Newcastle for the money, as well as boasting of his close relationship with England captain Beckham.
Eriksson announced Friday he would be taking legal action against the NoW for "breach of confidence".
It was not the first time since his arrival in England that Eriksson had been the subject of unflattering headlines.
Two years ago it was revealed he had held talks with Chelsea about the managerial vacancy eventually filled by Jose Mourinho. And his affairs with fellow Swede Ulrika Jonsson, a British TV personality, and Faria Alam, a former FA secretary, also made it into the newspapers.