Ms James said she would now sit in the European Parliament as an independent candidate, but interim leader Nigel Farage called on her to stand down as an MEP, denouncing her exit from the party as "yet another act of irrational selfishness".
Ms James resigned as leader in October – only 18 days after being elected – claiming she did not "have sufficient authority, nor the full support" of the party to continue.
Infighting has plagued Ukip since Mr Farage stood down, with one high-profile dispute involving leadership hopeful Steven Woolfe culminating in him leaving the party and claiming it was in a "death spiral"
In a statement, Ms James said the president of the European parliament, Martin Shultz, had accepted her request to stand as an independent.
"At a high profile public event in Cambridge last week, I was asked why I had not completed the process to become leader of Ukip," she said.
"I had little option, but to give the truthful response that, although nominated leader by popular vote in the membership, I found that I had no support within the executive and thus no ability to carry forward the policies on which I had campaigned.
"My decision to retire from the election process and not complete it was very difficult personally and professionally, given that Ukip has dominated my life and all my efforts for over five years.
"In recent weeks, my relationship with the party has been increasingly difficult and I feel it is now time to move on."
She vowed to continue to serve her constituents "effectively and diligently" as an independent for the remainder of her five-year term.
Yet, Mr Farage said: "This is yet another act of irrational selfishness from Diane James.
"This pattern of behaviour says that is she unfit to continue as an MEP. She should do the honourable thing and resign."
Ms James was considered one of Ukip's more reliable media speakers and was elected leader with more than 50 per cent of the membership vote.
Her departure means the contingent of 24 Ukip MEPs elected in 2014 are now reduced to 20, after Amjad Bashir, Janice Atkinson and Mr Woolfe all left the party.
Mr Farage's call for Ms James's resignation was echoed by Suzanne Evans, who said all four of the former members should stand down.
“I am very sorry to hear Diane James has decided to leave Ukip,” Ms Evans told Press Association.
“I am sure she has her own personal reasons and I do not question those.
“However she, like Steven Woolfe, were both elected as MEPs on a Ukip ticket, not as individuals. If they have any honour or integrity, both should now stand down as MEPs and vacate their seats.
"I reiterate my call for defectors Amjad Bashir and Janice Atkinson to do the same, for the same reasons.”
Ukip MEP Patrick O'Flynn said: “Sorry to lose a colleague but glad of my judgment that neither she nor Mr Woolfe were suitable candidates for leader.”
Ukip is currently undergoing its second leadership contest in a matter of months, with Ms Evans, Paul Nuttall and John Rees-Evans competing for votes of party members, with the successor to Mr Farage due to be announced on November 28.
Mr Farage denied Ukip missued the funds, claiming the party was suffering "pure victimisation".
Additional reporting by Press Association