His shock resignation deals a fresh blow to Starmer and comes at a precarious moment for the embattled Labour leader, a week before a by-election which could prompt a bid to replace him.
In stinging criticism, Healey warned that Starmer's long-awaited Defense Investment Plan (DIP) for funding over the next decade, which the premier has yet to publish, risked making Britain "less safe".
"You have been unable, and the Treasury has been unwilling, to commit the resources that the nation needs to defend the country at this time of rising threats," he wrote in a resignation letter to Starmer.
"After explaining to you that I would not be able to accept a DIP settlement that does not give our Forces the resources they need, I am now left with no other option than to submit my resignation."
Healey's sudden departure comes after months of delays to the defense plan, which Starmer has insisted he will publish before a NATO summit in Turkey beginning on July 7.
Starmer's centre-left government, elected in July 2024 following 14 years of Conservative rule, has pledged to ramp up defense spending, with priority given to NATO commitments.
The rise comes amid threats from Russia and as US President Donald Trump repeatedly urges NATO allies to spend more and become less reliant on Washington for security.
'Grave moment'
Starmer has vowed to raise defense spending to 2.5 percent of gross domestic product from next year, increasing to three percent if Labour wins the next general election, expected in 2029, before reaching 3.5 percent in 2035.
British media has for weeks been reporting on behind-the-scenes battles within the government over the DIP settlement.
In his resignation letter, Healey said he was first given full sight of DIP on Monday and it sees defense spending rise to only 2.68 percent of GDP in 2030.
It "falls well short of what is required for defence and the country at this dangerous time", he wrote.
"Without a DIP that meets the moment in this way, I am being forced to make decisions that would reduce the readiness of our forces and increase the risk to personnel on operations, and could make the country less safe."
Shadow Defense Secretary James Cartlidge says John Healey has shown "integrity" by resigning and tells the prime minister he is "paying the price" for prioritising welfare over a stronger military.
In a video posted online, he says Healey was "left with no choice" as the government was offering him "such a tiny amount of money" for the armed forces.
"This is not good enough," he adds.
Tan Dhesi, chair of parliament's defense committee, said the government must take Healey's warning "with the utmost seriousness".
"That a defence secretary of his integrity and commitment has felt compelled to resign in response to the inadequacy of the proposed defence settlement is a grave moment," the Labour MP said in a statement.
Starmer is facing political peril in next Thursday's contest when Greater Manchester mayor Andy Burnham stands for the Makerfield parliamentary seat and has said that he would participate in any Labour leadership race, although none has yet been triggered.
Wes Streeting quit as health secretary last month following disastrous local and regional election results for Labour and has also said he would run in any future contest.
Healey, 66, has been previously talked about as another potential contender, but there was no immediate suggestion that his resignation is linked to the leadership speculation.
The defense investment plan was originally expected to be published back in late 2025 but its release has repeatedly been pushed back, o the frustration of industry and others.
It was expected to be announced next week, according to reports earlier Thursday.
Healey's resignation "creates a sequence of political headaches in terms of a replacement, and trying to get the defense investment plan published," Ed Arnold, senior associate fellow at the RUSI think-tank, told AFP.
A government source insisted that Starmer had made Britain "safer", adding that the defense spending proposals "will deliver the capability our armed forces need".
Kevin Craven, chief executive of the ADS Group, the UK’s trade body for the aerospace, defense, security and space sectors, says Healey's resignation has "sent us reeling".
In a statement, he says the now former defense secretary "has consistently shown himself to be an intelligent, supportive and highly principled man, who has the best interests of UK defence as top of mind in everything that he does".
Craven adds: "His resignation today is something to lament, and is truly a damning reflection on the current state of affairs."
He warns that the consequences of getting the defence investment plan wrong "are of a magnitude far beyond our worst fears", adding that it's "imperative that an adequately funded Defence Investment Plan is published as soon as possible".
"It should not take the resignation of an honourable man for that realisation to sink in."
Also, Wes Streeting, who quit as health secretary last month citing a lack of confidence in Keir Starmer's leadership, has shared a short statement on X regarding Healey resignation.
"John was an excellent Defence Secretary. Every word of warning here needs to be heeded."
Meanwhile, Former Defence Secretary Penny Mordaunt says in a post on X that John Healey recognises "this moment for what it is.
"Pivotal for our national resilience and defence with devastating consequences if we fail to modernise and rearm. Thank you John. Country before party."
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