UberPop will cease in the city at midday on Thursday, the company told Swiss media.
Its drivers will be encouraged to gain a professional permit so they can drive for the company's slightly more expensive service, UberX.
UberPop is a budget version of the app-based ride-share service that essentially allows anyone to become a taxi driver with their own car.
Under the company's rules, UberPop drivers must be over 21 and own a car with four doors, but they need not be a professional taxi driver.
The service's low tariffs and casual nature mean most UberPop drivers are not full-time drivers earning a living from it and therefore should not be classed as ‘professional', feels the company.
But the legality of the service has long been questioned in Switzerland.
In June Zurich's government said that any driver who does not have a taxi permit is operating illegally and should be fined.
Not only must they obtain authorization from local authorities but they must also install a tachograph in their vehicles to monitor speed, driving time and rest times, it said.
On Wednesday Swiss workers' union Unia hailed Uber's decision to withdraw the UberPop service from Zurich as a “partial victory”, reported news agencies.
“The abandon of UberPop amounts to an admission that over the years Uber has systematically allowed and encouraged the illegal transportation of people,” it said.
Currently the decision applies only to Zurich, so UberPop drivers will continue to operate in Lausanne and Basel.
However a bill is currently under discussion in Lausanne which could make UberPop drivers liable for steep fines if they do not have a professional taxi permit.
The low-cost service has long riled professional taxi firms in Switzerland, who feel it undercuts them on price whilst not respecting regulations.