Writing in The Guardian on Tuesday, the professor of international law at University College London said plans for secret courts were "wrong in principle" and would "not deliver justice".
"It will be used to shield governmental wrongdoing from public and judicial scrutiny under conditions that are fair and just," he said.
Sands said Lib Dem support for the Bill, which has outraged a great many activists, showed the party had "lost integrity on one issue that has truly distinguished them from other parties".
He said:"Being a party of government does not mean such compromise is inevitable. This is particularly important now, as Conservative forces ratchet up their attacks on rights for all and against the European convention. At this moment the need for the Liberal Democrats to stand firm on issues of principle – for individual rights and open justice, against the security state – is greater than ever."
Over the weekend Lib Dem activists rejected government plans to hold some civil proceedings in private for fear of damaging national security, after Clegg ordered his MPs to support the Bill.
Sands resignation follows that of another leading human rights barrister, Dinah Rose QC, who said she could not support the Bill.
"The right to a fair hearing, and the right to open justice, are among the most fundamental of all our basic constitutional rights," she said.
"I just cannot see what purpose is served by the party, if it is prepared to support the bill. I have therefore decided, with great regret, to resign my party membership."
And on Sunday, a former Lib Dem parliamentary candidate and Federal Executive member Jo Shaw announced she was quitting the party in protest.
"If liberal principles are to mean anything, a liberal’s duty is to challenge excesses and concentrations of power, particularly concerning the State," she said.
"This party has a fine and proud history, both recently and in its previous incarnations, of campaigning to uphold civil liberties and human rights. I very much hope the party finds its principles and its soul again, and soon."