The news comes as a shock since Citroen have recently picked up both the constructors' title and, through Frenchman Sebastien Loeb, the drivers' title.
Peugeot came fourth in the constructors standings. PSA said the state of the market had forced them to put the brakes on their commitment to rallying, although they would be looking for other, less expensive avenues in sport in which to invest.
"Given the current economic climate in the industry PSA Peugeot Citroen has decided not to commit to the world rally championship beyond 2005," said a statement from PSA.
"In 2005 we will be studying alternative ways in which to keep in interest in sport with a reduced budget.
"As soon as we know, we will announce which disciplines we will be investing in beyond 2005."
Loeb's future uncertain
The news was met with dismay by Guy Frequelin, the director of Citroen's Sports department, although he admitted he could understand the company's decision.
"The market is unstable, and who's to say what the future holds," Frequelin said.
"The end of their rally involvement is something I obviously regret, but I understand it and accept it.
"The group just doesn't have the means to stay in the world rally championship."
PSA's decision also leaves a question mark over the car they were supposed to introduce into the world rally series in 2005, the C4.
Frequelin admitted it was "too early" to decide what Citroen would do with a car which Spanish driver Carlos Sainz had found to his liking after testing it this season.
As for Loeb's future, it remains uncertain. Frequelin told the newly-crowned world champion of the decision shortly before they released it.
However it would be logical for Loeb to start looking around for another team.
Ford still commited
On Tuesday last week, Ford, who have put their Jaguar Formula One motor racing team up for sale, said they would be staying in rallying for the next four years.
Ford's decision came on the back of the sport's world ruling body the FIA saying it would reduce costs for teams involved in the world rally championship.
PSA however said the current state of company finances would have to hold sway over the relative success they have enjoyed in the sport.
"We've been involved in world rally for five years in a row and picked up five constructors titles and three drivers titles, both of which are the fruit of the determined and passionate hard work of people from both Citroen and Peugeot," the statement added.
"But at the same time it has also required an important financial commitment."
PSA's decision comes only days after it was announced by the French automobile manufacturers' association that French car sales in the country had fallen 8.1% in October from the same month last year.
French-made cars saw a sharp 12.9% slump in sales, reducing their market share by 3.2 points to 57.5% in October.
PSA Peugeot Citroen sales were down 13.3%, lowering market share to 30.4% from 32.2%.