Widmer-Schlumpf, from the canton of Graubünden, was vague about her reasons for leaving, saying she wanted to spend more time with her family.
But the 59-year-old insisted her departure had nothing to do with the results of Swiss parliamentary elections on October 18th.
She had been widely expected to announce her resignation after her already tiny Conservative Democrats lost ground in the elections, while the populist rightwing anti-immigration Swiss People's Party (SVP) strengthened its already dominant position.
"I will leave the Federal Council (the government) at the end of the year," she told reporters.
The centre-right Liberals also gained significant ground at the election, tipping the scales in the lower chamber of parliament to the right.
The new parliament will elect the government's seven members in December, but the power balance in the house does not directly impact the make-up of the Swiss government.
Instead, the seven posts are traditionally shared among the major parties from right to left under a tacit decades-old agreement, dubbed "the magic formula" aimed at ensuring political stability.
But SVP's rise to become Switzerland's largest party in the late 1990s put pressure on the system, which had allowed the Swiss government to maintain an identical party-level composition for 40 years.
In 2003, SVP demanded that it take two seats instead of one to reflect its status in parliament.
Widmer-Schlumpf, then part of SVP's moderate wing, won its second seat in 2007 over the party's top choice, firebrand Christoph Blocher, and she was kicked out.
She held onto her seat, creating the Conservative Democrats, which in the last elections won just over four percent of the vote.
With its record 29.4 percent of the vote, SVP has increased its demands to recover its second seat.
During her time in office, Widmer-Schlumpf has perhaps been most associated abroad with her role in changing Switzerland's long-cherished tradition of banking secrecy with an agreement on the automatic exchange of banking data set to take effect by 2017.
Her departure opens up a campaign for her replacement in an election on December 9th for the federal government that is expected to see the other six incumbent cabinet members retain their seats.
The government's members are elected every four years by a joint assembly of the 200-seat lower house of parliament and the 46-member senate.