After a tight first Test lost by 68 runs, the Black Caps were forced to follow on and humbled by an innings and 154 runs in Galle last week, losing the series 2-0.
The defeat has prompted change, with Southee handing over the reins to Tom Latham who will lead the Kiwis in their upcoming series in India.
"I believe the way I can best serve the team moving forward is focusing on my performances on the field and getting back to my best, to continue taking wickets and helping New Zealand win Test matches," Southee said.
There is no denying Southee's contribution to Kiwi cricket: the 35-year-old starred in the 2021 World Test Championship victory over India and was a key plank of the Black Caps attack while the No.1-ranked nation.
However, the veteran paceman's future has been the subject of intense scrutiny in New Zealand after being found wanting in recent efforts.
It's been 18 months and 15 innings since Southee took more than two wickets in an innings.
He was particularly lacklustre in the high-profile home series last summer against Australia, with four wickets at 61, and his return in Sri Lanka was also miserable: two wickets at 78.5.
Coach Gary Stead said Southee's decision to step down spoke to his leadership and humility, and backed him to play on in red-ball cricket.
"It's not easy giving up something you love, but Tim is a true team-man and he's made the decision with the team's best interests at heart," he said.
"He's one of our greatest ever players and we still very much see him playing a part in our Test side moving forward."
Latham, 32, will lead New Zealand in a three-Test series against India beginning in Bengaluru on October 16, with a 15-man squad that will include Southee to be confirmed later this week.
Latham, New Zealand's wicketkeeper and opener, is in a form slump of his own with the bat.
The Cantabrian hasn't scored a century in almost two years, and has just two half-centuries to his name in the past 18 months.
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