The West Midlands MEP and former Dudley councillor says changes to the party made by current leader Gerard Batten have led to it being seen as 'a vehicle for hate towards Muslims and the gay community'.
Earlier this year, Mr Etheridge told Mr Batten to 'go to hell' after he was ordered to face disciplinary action over a trip to a conference in the Crimea.
Mr Etheridge, who lost his Sedgley seat on Dudley Council in May's local elections, subsequently had the party whip withdrawn.
He said: "I wish UKIP well and leave with great sadness that the party I loved has left me and taken a different direction."
Mr Etheridge joined UKIP in 2011 after quitting the Conservative Party.
He plans to remain in UKIP's EFDD group in the European Parliament under the leadership of Nigel Farage.
His departure will be seen as evidence of fresh turmoil in the party ranks less than eight months after the previous leader Henry Bolton was ousted following a vote of no confidence at an extraordinary general meeting of members in Birmingham.
In response, Mr Batten called on Mr Etheridge to do the 'decent and honourable thing' and resign his seat, returning it to UKIP “to which it morally belongs”.
“I am sure the loss of his salary, daily allowance and pension rights would be a small price to pay for a man of principle such as he,” he said.
“It was a great pity that Mr Etheridge was unable to make it to the UKIP conference in Birmingham last month where he could have witnessed the party members fully behind my leadership – the people who put him in the seat he currently holds by dint of their efforts and donations.”
Another former Dudley councillor, Dean Perks, has also quit UKIP.