Eddie Murphy, who was announced in August as host of the Oscars, is also out. He stepped down just one day after Ratner, his business partner and the director of his latest film, resigned as the Oscar telecast producer.
"First and foremost I want to say that I completely understand and support each party's decision with regard to a change of producers for this year's Academy Awards ceremony," Murphy said in a statement. "I was truly looking forward to being a part of the show that our production team and writers were just starting to develop, but I'm sure that the new production team and host will do an equally great job."
The world's most famous awards show is now in turmoil.
"In Los Angeles, this is a huge deal," said entertainment reporter Jeanne Wolf. "The audience at home doesn't pay much attention to who produces the Oscars, but in this town, the Oscars is the ultimate. It's the coronation."
Wolf said Murphy's resignation should come as no surprise.
"Let's remember, he made his name as a naughty boy, so he may not have wanted to be watched so closely," Wolf said.
The controversy started during a press event for "Tower Heist," when Ratner, the film's director, used a term offensive to gays.
Word of the slur traveled quickly through the gay community, and by Tuesday, Ratner had stepped down as co-producer of the Oscar telecast.
In a lengthy statement, Ratner said, "I'd like to apologize publicly and unreservedly. Please know that I will be taking real action over the coming weeks and months in an effort to do everything I can both professionally and personally to help stamp out the kind of thoughtless bigotry I've so foolishly perpetuated."
The leadership at the Gay and Lesbian Alliance Against Defamation confirmed they're already working with Ratner.
"He and GLAAD are going to be working together to sort of foster a dialogue about how to take this incident, which was obviously negative, and turn it into something positive by really helping to educate people about the impact of this kind of language," Herndon Graddick of GLAAD.
Academy President Tom Sherak said by resigning, Ratner did the right thing for the Academy and for himself.
"Words have meaning, and they have consequences. Brett is a good person, but his comments were unacceptable," Sherak said in a statement. "We all hope this will be an opportunity to raise awareness about the harm that is caused by reckless and insensitive remarks, regardless of the intent."
On Murphy's exit, Sherak said, "I appreciate how Eddie feels about losing his creative partner, Brett Ratner, and we all wish him well."
A replacement for Murphy has not yet been announced.