He went with a withering swipe at the Maine Road managers who he claimed have wasted millions on poor players and criticised the people inside the club who "have tried to blacken my name".
The 53-year-old Lee resigned as chairman and as a director, leaving his deputy, David Bernstein - a life-long supporter who heads the clothing chain French Connection - in charge. Dennis Tueart, another former City player, becomes director of football, with John Wardle, the boss of JD Sports, joining the board.
Lee paid pounds 3m for a 29.9 per cent stake in City in February 1994. Eight managers and pounds 30m spent on players later, they are facing relegation to the Second Division for the first time in their history - a struggle which still draws 30,000 crowds.
"My family life, personal life and business life have been severely disrupted by events over the past few months to such an extent that it has become impossible and impractical for me to carry on," Lee said in a statement.
"As a player I took great pride in playing for Manchester City and I was also very proud to have become chairman. Consequently, over the last four years I have tried very hard to create a situation where everyone would be proud, pleased and privileged to be associated with Manchester City.
"I feel I have done my very best for the club. However many improvements are made off the field it is the improvements on it for which the chairman is judged. I leave with my integrity and character intact."
Lee did not single out individual managers, but the bulk of signings under his chairmanship were made by Alan Ball and Frank Clark. "We have not bought quality and organised them right. It has not worked for us on the pitch," Lee said. "The purchase of players have not been worth the value we have paid for them, with the odd exception like Georgi Kinkladze."
He denied that he had interfered with team selection. "I have been accused of all kinds of things which are totally untrue," he said. "There are, behind the scenes at Maine Road, some very insincere people, who have tried to blacken my name. There were enemies within and without."
Bernstein, who was brought into the club by Lee, offered no quick remedy and stressed that the club will have to cut their cloth according to their finances.
"I know the tension that the supporters feel. I feel exactly the same way, absolutely awful," he said. "We will give it everything."
However, he suggested the possibility of standing aside if new money was forthcoming and many observers feel his spell as chairman will be short-lived. Mike McDonald, the Sheffield United chairman, has been pushing for a stake in City for some time.
The position of the manager, Joe Royle, who was appointed in February, appears secure.