Bwalya was voted Africa's top footballer in 1988 and then become president of Zambia's FA before he was unseated in last year's elections.
He said he was pulling out to concentrate on winning re-election to the African governing body's executive committee.
Elections for African places on the new-look Fifa Council will be held at the Confederation of African Football (Caf) Congress in Addis Ababa on 16 March, at the same time as the Caf executive committee vote.
Bwalya was initially standing for places on both bodies but told reporters: "I have decided to withdraw from the race, to concentrate on retaining my ex-co position."
Bwalya was one of three candidates for the place on the Fifa Council reserved for a representative from Africa's Anglophone countries.
His withdrawal leaves a straight fight between Ghana Football Association president Kwesi Nyantakyi and Leodegar Tenga of Tanzania.
Africa has seven places on the Fifa Council, which has been renamed and expanded since Gianni Infantino came to power one year ago.
One place is automatically reserved for the Caf president and another for a female representative.
The other five places will be decided in Ethiopia on 16 March.
Zambia's former African Footballer of the Year, Kalusha Bwalya, has withdrawn from the race for a place on the Fifa Council - less than two weeks before the elections for African representatives.