Barclays PLC (BCS) Chief Executive Bob Diamond resigned Tuesday, caving in to intense political and investor pressure following an interest-rate setting scandal.

The move follows the decision by Barclays Chairman Marcus Agius to quit and effectively leaves one of Europe's largest banks without leadership. Barclays said that Mr. Agius will stay on at the company until the hunt for a new chief executive is completed. "The search for a new chief executive will commence immediately and will consider both internal and external candidates," Barclays said. Mr. Diamond will leave the bank with immediate effect.

Mr. Diamond had come under increasing pressure to step down after the bank paid several hundred million pounds to settle a U.K. and U.S. probe that showed that traders at the bank had blatantly sought to manipulate a key interest benchmark.

The U.K. government announced a series of inquiries into ethical standards in the banking industry and the U.K. Serious Fraud Office said it was mulling criminal prosecutions against those who attempted to rig the rates. "I am deeply disappointed that the impression created by the events announced last week about what Barclays and its people stand for could not be further from the truth," Mr. Diamond said.

The CEO's departure comes one day before he will face tough questions from the U.K.'s Treasury Select Committee over the interest-rate scandal. A spokesman for the bank said Mr. Diamond would still appear before the committee.

The 60-year-old chief executive has faced a tumultuous 17 months as the head of the bank. During his stint, Mr. Diamond attempted to reshape Barclays into an investment banking powerhouse.

However, he came under pressure from investors after the plan fell short amid the economic crisis. He also sparked the ire of politicians and regulators with his brazen style that saw him defend banker pay and fend off a tax and insurance misselling scandal.

However, the latest controversy proved to be a bridge too far, analysts say. "Ultimately they've reached the right decision. Diamond was a key drag to sentiment," said Gary Greenwood at Shore Capital.

Barclays declined to comment on when a successor to Mr. Diamond would be named. On Monday the bank was reviewing succession plans for the CEO, according to a person familiar with the matter. Internally the quietly spoken head of Barclays' retail business Antony Jenkins was being touted as a potential successor, as is the newly named chief operating officer Jerry del Missier, according to this person.

Mr. Diamond's departure marks a victory for the U.K.'s political establishment, which has long complained about the bank's management culture. On Tuesday, U.K. Chancellor George Osborne hailed the move.

"I think it's the right decision for Barclays; I think it's the right decision for the country because we need Barclays bank to focus on lending to our economy and not distracted by this argument about who should be in charge," said Mr. Osborne on BBC radio. "I hope it's a first step to a new culture of responsibility in British banking."

On Monday, Barclays promised to launch an independently led audit of its business practices as Mr. Agius confirmed reports he would resign, in an attempt to take responsibility for last week's $453 million settlement of an interest-rate manipulation probe.

At 0817 GMT, Barclays' shares were up 1.2%. They had opened down 3% after the Diamond announcement.

-Write to Max Colchester at max.colchester@wsj.com

(Peter Evans and Marietta Cauchi contributed to this article.)