It was not immediately clear whether the development meant the May would automatically become the nation's next leader.
Leadsom said that May had much wider support among party MPs, and that if she had won the prime ministership, she would have struggled to unite the party.
"I have ... concluded that the interests of our country are best served by the immediate appointment" of a prime minster, Leadsom said on Monday.
"I am therefore withdrawing from the leadership election," she said, adding that May had her "full support."
The ruling Conservative Party had whittled down its candidates from five to two in rounds of votes among MPs, and the wider party of around 150,000 people was set to decide between the two.
Prime Minister David Cameron announced his resignation following the June 23 European Union referendum, failing to persuade the British people to remain in the union.
Leadsom's withdrawal from the race came in the face of pressure from a faction of MPs in the warring Conservative Party.
The energy minister has drawn fierce criticism in the past week, accused of exaggerating her professional experience on her CV, and making claims that she was better placed to run the country than May because she is a mother.
Theresa May also made a speech Monday, speaking confidently that she would become the country's next leader.
"Brexit means Brexit and we're going to make a success of it. There will be no attempts to remain inside the EU. No attempts to rejoin it by the back door. No second referendum. The country voted to leave the European Union and as prime minister, I will make sure we leave the European Union," she said.
May, who was the frontrunner in the race, has been described as "a safe pair of hands" to take the country through its negotiations with the European Union.
CNN political contributor Robin Oakley said May, who had reputation as a serious-minded workaholic, was "the nearest thing you could find in British politics today to Margaret Thatcher."
One of the longest-serving home secretaries in British history, May backed remaining in the European Union, though she is known to hold Euroskeptic views and didn't take a prominent role in the campaign.
Leadsom was fierce advocate of leaving the EU, marking quite a turnaround for the politician, who three years ago said it would be a "disaster" for the UK to leave the union .
She defended that stance, saying that she had been on a "journey" since and had changed her mind.
Leadsom set out her post-Brexit vision ahead of the vote in a speech that lacked conviction but was peppered with a strong sense of patriotism.
"I truly believe we can be the greatest nation on Earth," she said, promising "prosperity," not "austerity."