Peete was indicted last year on bribery charges in connection with a billboard zoning case in what federal prosecutors and the FBI dubbed Main Street Sweeper. He has pleaded not guilty.
City Council Chairman Tom Marshall announced the resignation to reporters Thursday, saying he accepted it "with a heavy heart."
Marshall said the seat would be declared vacant Friday. All members of the City Council are up for reelection this year. It is not clear whether the seat will remain vacant until the election or will be filled by an interim appointee. Peete was previously convicted of bribery in a separate case, served prison time, and was reelected.