The 31-year-old's decision to relinquish the role came in the wake of a text messaging scandal involving a Knights employee.
After a meeting with club staff, Pearce told the Knights' playing group of his decision on Wednesday before their return to pre-season training on Thursday.
The former NSW State of Origin halfback read a written statement to reporters at a media conference on Thursday, the first time he has spoken publicly since his wedding to fiancée Kristen Scott was called off last month.
"It's been a traumatic few weeks in my personal life and for those I love," Pearce said.
"Unfortunately my actions have impacted the team and, more importantly, the people I have closest to me, Kristen and my family.
"I'm taking steps now to address these issues and I feel it would be in the best interests of the club for me to step down as captain for the season.
"I love this club and I love my family and I've committed to working as hard as I can to be the best man I can be both on and off the field."
Knights coach Adam O'Brien said Pearce's off-field saga was "not an ideal situation" for a club desperate for success after making the finals for the first time in seven seasons in 2020, only to be bundled out in week one.
O'Brien said the decision to step down was Pearce's own call and dismissed any speculation of a rift within the playing group, with senior players understood to be close friends with the long-term partner of the Knights staffer involved in the scandal.
"It is a private matter and their welfare is the number one priority before football but ... the group is not divided," O'Brien told reporters.
"If anything, Tuesday served to probably galvanise them a little bit.
"They understand that the team is like a family. They understand that family members make mistakes.
"If we're a good family, you don't turn your back on family members, you support them."
The latest controversy comes at the worst possible time for Pearce who is in negotiations with the Knights to extend his contract beyond the end of this season.
A sticking point is believed to be money but his latest indiscretion will not do him any favours during the bargaining process.
Pearce was understood to have found stability at Newcastle with Scott after several controversies with the Sydney Roosters.