The ex-minister, who became the youngest MP when she secured a stunning by-election victory over Labour in Brent East almost exactly a decade ago, said her relationship with the party was broken.
She has issued a stinging criticism of her own party over immigration and welfare as she .
A Lib Dem spokesman said it was "disappointed" by her decision - which comes a week before the annual party conference - and defended its "proud record" in the coalition Government.
Explaining her decision to step down in 2015, Ms Teather pointed to the junior coalition partner's decision to back the Tories' planned cap on welfare, while she was in Government.
"It was the moment of realising that my own party was just as afraid of public opinion as the Labour Party. Something did break for me that was never, ever repaired," she told The Observer.
And she said she was "utterly desolate" when the Lib Dem leader, Deputy Prime Minister Nick Clegg, said some immigrants should be asked to pay a £1,000 returnable "bond" when requesting a visa.
The party spokesman said: "Of course we are disappointed by Sarah's decision.
"The Liberal Democrats have a proud record in Government, including cutting taxes for working people by £700 and lifting the poorest paid out of tax altogether, helping businesses create a million jobs; investing billions more in schools to help the poorest children and introducing radical plans for shared parental leave.
"Sarah was a part of this when she served as a minister in the Coalition, as well as playing a key role in ending Labour's disgraceful policy of locking up children for immigration purposes."
Ms Teather, who lost her place as an education minister in a reshuffle a year ago, said the latter policy was her "proudest moment in government" .
In 2003 she rode a wave of anti-Iraq war sentiment to overturn a Labour majority of more than 13,000 and as a rising star of the party managed to increase her majority at the 2005 general election.
Following boundary changes she won the Brent Central seat in 2010, by a slim margin of 1,345.
She joined the government ranks immediately after the formation of the coalition, as Minister of State for Children and Families but lost her place to make room for the returning David Laws.
"My proudest moment in government was when Nick Clegg announced that we were ending the routine detention of children in the immigration system," she told the newspaper.
"That was without doubt the moment when I really thought it was all worth it. I worked hand in hand with Nick on that. It was hugely important."
But she said she was "catastrophically depressed" about the immigration announcement.
"It took me some time before I began to communicate with Nick Clegg," she said.
"I couldn't even be angry. I was utterly desolate."
She said she had found herself in the "ridiculous" position of trying to stoke opposition to the benefit in the outside world to prompt a debate within Whitehall.
It was especially hard as she still considered Mr Clegg "basically a decent bloke".
"I was spending hours worrying about how to balance fighting for what I believed in and being true to the stuff that took me into politics, while not being disloyal to my colleagues," she said.
On the backbenches she has been a consistent critic of social policy but said she could not sustain that for another decade "and behave like a normal human being that I like".
Former party chief executive Chris Rennard said Ms Teather's decision "is a tragedy for the Lib Dems" despite her opposition to same-sex marriage over which they "disagreed strongly".
Tory MP Nadine Dorries wrote on Twitter: "Hope knives stay locked away re Sarah Teather. She was never going to retain seat in 2015, has been a good constituency MP. Good luck to her."