Mr Donaldson resignation from the UUP brings to an end his bitter five-year fight to have the party take a stronger line with Sinn Féin by opposing the Belfast Agreement in its current form.
In June, he angered supporters of party leader David Trimble after he resigned the Ulster Unionist whip at Westminster along with party president the Rev Martin Smyth and South Antrim MP David Burnside.
Neither Rev Smyth or Mr Burnside have indicated their intentions in light of Mr Donaldson's move.
Matters came to a head for the three MPs after the party leadership refused to reject Irish and British government proposals for implementing the Agreement.
In July, the High Court in Belfast ruled party officers failed to follow their rules properly after they moved to suspend the MPs.
A second bid to discipline the MPs was put on hold in September after the 900-member Ulster Unionist Council backed Mr Trimble's call on them to stick by party policy.
However, Mr Trimble's supporters were further angered by Mr Donaldson's criticism of the leadership in the aftermath of last month's Assembly elections where the rival DUP emerged the largest unionist party.
Mr Donaldson was ordered by the 110-member party executive last Friday to toe the party line or face fresh disciplinary moves.
The Lagan Valley MP said tonight: "After five years of arguing within the party for a better agreement, I have had to consider how we can best achieve that.
"Unfortunately I have been excluded by David Trimble from his negotiating team and I was threatened as recently as last Friday with expulsion from the party.
"I have come to the view that the Ulster Unionist Party no longer provides the vehicle for me to use my talents to achieve what I was mandated to work for.
"The meeting of the party executive last Friday was the final straw.
"I concluded that the party is out of touch with the views of ordinary unionists, the two thirds of the unionist electorate who reject the Agreement.
"I cannot see how the UUP could ever be the majority party in Northern Ireland or provide the leadership that is required, certainly under David Trimble's leadership."
Mr Donaldson, a protege of former UUP leader Lord Molyneaux and former constituency agent for Enoch Powell when he was the MP for South Down, said he had long argued for a strong unionist movement.
The Lagan Valley MP said a realigned unionist movement could "deliver a better agreement" in Northern Ireland commanding the support of both unionists and nationalists.
With Sinn Féin emerging the largest nationalist party, he argued that a stronger unionist voice was also needed.
"We are in a situation where Sinn Féin could at the next Westminster election swallow up the three SDLP seats and they could emerge not just the largest nationalist party but the largest party," he said.
"If unionists want to avoid that nightmare scenario they have to forge a more united movement and that is why I have taken this decision."
PA