The Member for Barnsley Central said he "deeply, deeply" regretted his actions and would be resigning before his sentencing next month.
In a statement issued by his office, Illsley said: "I would like to apologise to my constituents, family and friends, following my court appearance, for the distress and embarrassment caused by my actions that I deeply, deeply regret.
"I have begun to wind down my parliamentary office, following which I will resign from Parliament before my next court appearance.
"I will be making no further comment."
Illsley's decision to step down will be a relief to MPs who feared more damage to Parliament's already tarnished reputation.
The revelation yesterday that he could potentially receive his salary while in prison if a sentence of less than 12 months is imposed prompted both David Cameron and Labour leader Ed Miliband to urge him to go voluntarily.
There had been suggestions that the House could be asked to back a motion expelling the MP, which would have been the first time such a mechanism had been used in decades.
But Commons Speaker John Bercow made clear today that could not happen until court proceedings were complete because the matter was still sub judice.
Illsley, who had already been suspended by the Labour Party, became the first sitting member convicted for abusing expenses when he changed his pleas to guilty at the start of his trial.
He had previously argued that lax Commons allowances were designed to "supplement" the income of politicians.
The dishonest claims - totalling around £14,500 - were made for council tax, telephone usage, service charges and maintenance, and insurance and repairs at his second home in Renfrew Road, Kennington, south London.
The judge ordered the hearing to be adjourned for at least four weeks for a pre-sentence report.
The Representation of the People Act 1981 disqualifies MPs if they receive a custodial sentence of 12 months or more. In those circumstances, their seat is automatically vacated and a by-election held.
There is no set mechanism for expelling members who are handed shorter jail terms.
The Commons authorities indicated that the whole House would need to pass a resolution removing him from his seat. Tory Peter Baker is believed to be the last MP expelled in 1954, after he was convicted of fraud.
Labour grandee Sir Stuart Bell, who was among those pressing for Illsley's immediate ejection, welcomed his departure.
"He has made the right decision in the interests of his constituents, in the interests of the House of Commons, in the interests of his friends and family," he said.
"It is a tragic end to what had been a fine parliamentary career."
To resign, Illsley will apply for the ceremonial post of Steward of the Manor of Northstead. A by-election will then be triggered in his safe Labour seat.
The 55-year-old will not receive a "golden goodbye" pay-off from Parliament, as the controversial system of resettlement grants - which could be worth up to £65,000 - ended after the general election.
He will still be able to claim for the costs of winding up his office.
On Friday, former Labour MP David Chaytor, who stood down at the election, became the first person to be jailed over the expenses scandal.
He was sentenced to 18 months after admitting he forged tenancy documents and invoices to falsely claim more than £22,000 of taxpayers' money from House of Commons authorities for rent and IT work.
It is understood Illsley was given an ultimatum that he would face a cross-party expulsion motion unless he went voluntarily.
Initial discussions had apparently taken place on varying the House's sub judice rules to kick him out immediately.
Asked about the situation last night, the Prime Minister's spokesman insisted it was "untenable" for Illsley to remain in Parliament.
Meanwhile, Mr Miliband said: "He is no longer a Labour MP and I think he should now do the right thing and resign as an MP."
And a senior Labour source added: "If he does not resign, we will work with others to remove him from Parliament."
Comments