Jaber al-Harmi, editor in chief of Al-Sharq, stepped down after a picture appeared in the newspaper of a woman's hands covered in traditional henna tattoos depicting scenes from the Kama Sutra, the famous Indian sex manual.
In a copy of the paper's Monday edition seen by AFP, the picture was published in the health section above an article warning of the dangers of henna.
The image showed the woman's palms decorated in numerous tiny tattoos showing a couple engaged in sexual intercourse.
Harmi took to the paper's website to describe the incident as "a completely unintended mistake" and the "worst" he had known in his 25-year career in journalism and said he took full responsibility for what happened.
He said he "offered my resignation out of moral responsibility".
It is not yet known if the resignation has been accepted by the paper's bosses.
"All apologies are not enough for such a serious mistake, which occurred by publishing morally inappropriate images," wrote Harmi.
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"Our values and principles provide a red line that cannot be breached and so I presented my resignation to the board."
He added: "This tragic incident revealed to us the extent of the adherence of our community to religion, values and morals."
On Twitter, he wrote that "all those behind this mistake" have been fired.
The photograph prompted a huge reaction on social media in the deeply-conservative Muslim country and neighbouring Gulf countries.
Some urged the editor to stay in his job and blamed others for the publication of the photograph.
"What happened is a mistake by the employee in charge and Mr Harmi shouldn’t be blamed," one Twitter user said.