The accountancy firm has previously been involved with Celotex, the company which supplied Grenfell Tower’s cladding, as well as the Rydon Group, the lead contractor in the buildings renovation three years ago.
A spokesperson for the inquiry said KPMG had been appointed to provide “limited planning and programme management” during its “start-up phase”.
A statement released by the inquiry said: “Following concerns expressed by some core participants, the inquiry team has discussed the contract with KPMG which has agreed that its work should now cease.
“The support and confidence of all core participants is integral to the work of the inquiry.”
KPMG said it was confident there were no conflicts of interest between its work for the inquiry and its other clients, although the firm recognised that “strength of opinion about our role risks undermining confidence”.
A spokeswoman for the firm said: “We have therefore mutually agreed with the inquiry that we will step down from our role with immediate effect.
“We were appointed to advise on structuring a project management office for the Grenfell Tower public inquiry.
“Our role was purely operational and advised on project management best practice and had no role advising on the substance of the inquiry. We will waive our fees for our work undertaken to date.”
Pop star Lily Allen, politicians and academics, had earlier sent an open letter to Theresa May urging her to reverse the decision to appoint KPMG.
They said they did not speak on behalf of Grenfell victims, but were “deeply concerned over the obvious conflicts of interest” posed by KPMG’s involvement in the inquiry.
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The public inquiry into the fire, which killed 71 people, has been dogged by controversy since the appointment of retired judge Sir Martin Moore-Bick as its chairman.
Survivors and bereaved families have lobbied for an overhaul of the inquiry’s shape due to lingering doubts about his suitability for the role. It is hoped that evidence hearings will begin after Easter.