"I believe it will take a number of years to reach an acceptable position and that is what I am unable to commit to. A longer term coach is crucial for future success."
The seven-time premiership-winning coach advised Knights players and staff on Thursday morning of his decision.
He told the club he intends continuing coaching but hasn't begun discussions with any other club.
Knights boss Matt Gidley said he was disappointed to see Bennett go but understood his decision.
"Wayne has made this decision because he believes it is what is best for the club," Gidley said.
"Wayne's experience has been invaluable, particularly during our challenging periods."
Bennett will leave the Knights without bringing a premiership to Newcastle.
The side struggled under him in 2012, but he took them to within one game of the grand final last year before they were soundly beaten by eventual premiers the Sydney Roosters.
A return to St George Illawarra, where he enjoyed premiership success in 2010, has been mooted for Bennett.
He has also been linked to a return to Brisbane where he enjoyed such success.
-AAP
