Without a contract for 2024, Fittler put a coaching proposal to the NSWRL board last week, which included a complete overhaul of his staff for the next series.
Fittler had proposed that Phil Gould would come on board as an advisor, along with Matt King and Dean Young as assistants.
The NSWRL board met on Wednesday to discuss Fittler's proposal and his own future in the role.
AAP was told that the NSWRL were unlikely to initially offer Fittler any more than a one-year deal.
Instead, Fittler withdrew from the process on Thursday, leaving the Blues to search for a new coach next season.
Fittler took over as NSW coach in 2018, after a period of sustained dominance for Queensland and just one Blues series win in 12 years.
He immediately found success, coaching the Blues to series wins in both 2018 and 2019 before being beaten in the COVID-affected 2020 campaign.
NSW easily won the 2021 series on the back of the attacking flair of Tom Trbojevic and Latrell Mitchell, but were beaten in the two series that followed.
"The Board understands and respects his decision," NSWRL chairman Paul Conlon said in a statement following Fittler's decision.
"Freddy was a legend as a player and returned to coach the team at a time when his state needed him.
"He enjoyed immediate success and his series win in 2021, which included record scorelines in Townsville and Brisbane, will go down in NSW Blues history.
"He also contributed through other programs including his Hogs motorcycle rides in regional NSW which played a big part in uniting the state.
"He holds a special place in NSW Rugby League history."
Fittler said he thoroughly enjoyed his time coaching the Blues.
"I loved doing the job and I will always love NSW," he said.
Fittler's exit comes on the same day Billy Slater signed a three-year contract extension to remain in charge of Queensland's Origin side.
