"I will step aside because I think the party is ready for something different," Steele said after losing ground over four rounds of balloting.
Priebus, the Wisconsin Republican Party chairman, surpassed the 85 necessary votes in the seventh round of balloting.
Former Michigan GOP chairman Saul Anuzis and GOP operative Maria Cino came in second and third.
Priebus will serve for the next two years. The job of the chairman includes serving as spokesman, promoting the party's agenda and raising campaign money.
The new chairman must retire an RNC debt of about $22 million owed to vendors and banks.
Steele has faced frequent complaints about questionable spending, weak fundraising efforts and cringe-inducing comments.
The Associated Press contributed to this report.