The news, announced by a grim-faced Jacques Santer, European Commission president, came after midnight following an emergency three-hour meeting of the commissioners in Brussels.
Mr Santer said the Commission had decided "by unanimity to resign collectively", adding that it was "assuming its responsibilities in line with the undertakings it gave" when the inquiry was set up.
The 30-second statement took the European Union intouncharted waters, creating a vacuum at the heart of the 15-nation union.
It remains unclear whether all commissioners will remain in post as caretakers and whether Mr Santer will stay on for the time being or make way, perhaps for Sir Leon Brittan, vice-president. Discussions with the German presidency of the EU are expected today.
Franz Fischler, the agriculture commissioner, was the first to give indications of the decision, telling journalists he had left the meeting because "the European Commission does not have the confidence of the other institutions".
Neil Kinnock, the transport commissioner, said: "I stand on my record of work, accountability and management which has not been called into question or been the subject of criticism by this report. I interpret the outcome of that report in a way that makes me feel obliged to resign."
The fate of the Commission was sealed earlier when MEPs made it clear that the resignation of Edith Cresson, the commissioner singled out for most criticism, would be insufficient.
Just after 9pm, the largest group in the European Parliament, the Socialists, demanded the dismissal of the entire Commission, dealing a mortal blow to Mr Santer's prospects of survival. "We are calling on the European Commission to accept their responsibility for the conclusions of the report and to resign," Pauline Green, the Socialist group leader, said.
Her comments were particularly significant since the Socialists helped to avert disaster in January when the Parliament held a censure vote on the Commission.
The resignations came at the climax of a remarkable day during which the fate of the once-mighty European Commission was decided in less than seven hours. At 5pm Mr Santer was handed a copy of the report which constituted the most devastating verdict ever delivered on Brussels. The five-strong team of independent experts, set up in January by the European Parliament, ruled that Ms Cresson, commissioner for education and research, was guilty of "favouritism". She also stayed silent of irregularities in the pounds 400m Leonardo project, even though she was "in full possession of the facts", it ruled.
Ms Cresson emerged as the individual responsible for the most obvious abuses. The former French premier was criticised over "a clear-cut instance of favouritism" - the appointment of a friend, the dentist Rene Berthelot, to the position of scientific adviser.
His appointment was manifestly irregular, the inquiry team argued, citing his frequent paid missions to his home town on supposed Commission business as evidence of the "fictitious nature of the scientific advice" he was supposed to be giving.
But the report also delivered a lethal critique of the Commission, arguing that the failure of commissioners to keep track of developments was "tantamount to an admission to loss of control". It added that "it was becoming difficult to find anyone who has even the slightest sense of responsibility".
Monika Wulf-Mathies, commissioner for regional policy, and Joao Pinheiro, the Portuguese commissioner, were criticised for favouritism.
Mr Santer was singled out for taking no "meaningful" interest in the operation of the Commission's own security office, which was operating like a "state within a state".
Downing Street sources confirmed that Britain would be seeking the reappointment of its two commissioners, Sir Leon and Mr Kinnock, as they were not implicated in any wrong-doing.Reuse content