He cited the "embarrassing situation and public perception of differences between my views and administration policy" as the reason for retiring.
He was the subject of a recent article by Esquire magazine, which said he was opposed to the use of force against Iran over its nuclear programme.
The 63-year-old admiral became head of the US Central Command a year ago.
'No policy differences'
US Defence Secretary Robert Gates said the decision to take early retirement was entirely Adm Fallon's, added that he agreed it was the right thing to do.
"I have approved Admiral Fallon's request to retire with reluctance and regret," he told reporters at the Pentagon, adding that he would be sorely missed.
| | I don't believe there have ever been any differences about the objectives of our policy in the Central Command Adm William Fallon |
President George W Bush said the admiral deserved "considerable credit for progress that has been made... in Iraq and Afghanistan".
The Esquire article suggested Adm Fallon was standing up to a president supposedly contemplating war with Iran.
He is described in the article as "the strongest man standing between the Bush Administration and a war with Iran".
Mr Gates said the idea that Adm Fallon's departure indicated that the US was planning to go to war with Iran was "ridiculous".
He said "there is a misperception" that the admiral disagreed with the Bush administration's policies towards Iran. "I don't think there were differences at all," Mr Gates said.
The Bush administration's official policy towards Iran is to use diplomatic and economic pressures to resolve differences while retaining the possibility of military options.
The US and other Western nations suspect Iran is using its nuclear programme to develop atomic weapons - a charge Tehran denies.
In a statement released through Central Command's Florida headquarters, Adm Fallon said: "I don't believe there have ever been any differences about the objectives of our policy in the Central Command.
"The simple perception that there is makes it difficult for me to effectively serve America's interests there."
Central Command covers an area from the Horn of Africa into Central Asia and includes responsibility for the wars in Iraq and Afghanistan.
From the BBC.
Not sure what to make of this, but it is concerning to me. I have thought that the Bush admin might try to use military force in Iran during the last days in office as a means to "lock in" the neo-con vision of US military presence in the Middle East, and this might sadly support this fear...but let's hope not.
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