The justice's decision, to be effective on July 31, gives President Donald Trump the second chance to nominate a justice.
"It has been the greatest honor and privilege to serve our nation in the federal judiciary for 43 years, 30 of those on the Supreme Court," Kennedy, who turns 82 in July, said in a statement.
Nominated by Republican President Ronald Reagan and confirmed in 1988, Kennedy is widely thought to be a moderate and pivotal swing vote on the court. He sided with liberals to advance gay rights, save ObamaCare and limit the death penalty, while voting with the conservative wing to protect religious liberty and limit campaign finance laws.
In a quick response, Trump said in the White House that a search for Kennedy's successor will begin immediately. It is unlikely for the president to pick another moderate justice instead of a conservative one, local analysts say.
Furthermore, of the court's four liberals, Justice Ruth Bader Ginsburg is 85 and Justice Stephen Breyer turns 80 this summer, meaning Trump could have the chance to fill more openings.
Republicans changed Senate rules last year to get Trump's conservative nominee, Neil Gorsuch, confirmed, lowering the threshold to advance Supreme Court nominations to a simple majority vote.
Supreme Court vacancies have become a key voting issue in the US presidential elections. In a CNN exit poll, 70 percent of 2016 American voters said the Supreme Court was an important factor in their vote.