Dr Bernard MacManus told the university's governors of his decision to leave after a staff survey revealed that more than 90 per cent were unhappy with the university's management.
They were 'under stress, undervalued and under fire', according to the local branch of the National Association of Teachers in Further and Higher Education (NATFHE), which questioned 117 academics.
Heads of department had backed the staff and had asked the university's board of governors to make changes. Dr MacManus's dynamic style of leadership left them with too little autonomy, they said.
The university was told two weeks ago that it is to lose almost pounds 500,000 in government funding next year after failing to fill all its places last summer.
Courses in popular subjects such as communications and business studies were being cut and replaced with science courses which attracted higher fees but which proved unpopular with students, staff said.
Dr MacManus joined the Dorset Institute of Higher Education as principal in 1983. He presided over its elevation to the status of polytechnic in 1990, and to that of a university in 1992.
Student numbers have risen rapidly despite the spare places on some courses last year. The university has specialised in finding gaps in the higher education market, opening degree courses in vocational subjects such as retail management and public relations.
Last night, Kevin Moloney, NATFHE secretary at the university, said the union survey's findings had articulated long-standing grievances. It was well-established amongst staff that there was a climate of fear here. Clearly they felt unhappy and they expressed that in the survey,' he said.
The union, which represents 180 of the 230 academic staff, found that there had been a deterioration in morale. Nearly four out of five staff members said they suffered from stress, and the vast majority said they had little input into the decision-making process.
A statement from the university said that the board had been unanimous in its decision to accept Dr MacManus's resignation.
'The board acknowledges the skill, effort and enthusiasm that the rise from Dorset Institute of Higher Education to university status required.
'The university has now reached a different period in its development, one of consolidation where it will build on its existing academic reputation,' it said.