The children on board the Sewol were told to stay put in their cabins, where they waited for further orders. The confirmed death toll on Sunday was 187.
South Korea, Asia's fourth-largest economy and one of its leading manufacturing and export powerhouses, has developed into one of the world's most technically advanced countries, but faces criticism that regulatory controls have not kept pace.
Read MoreSouth Korea president likens actions of ferry crew to murder
As part of the investigation, prosecutors raided two shipping safety watchdogs and a coastguard office. They have also raided two vessel service centres, which act as maritime traffic control.
Chung's resignation has to be approved by President Park Geun-hye, who has the most power in government.
"Keeping my post too great a burden on the administration," a sombre Chung said in a brief announcement. "...On behalf of the government, I apologise for many problems from the prevention of the accident to the early handling of the disaster.
Read MoreScenes from South Korea's ferry disaster
"There are too many irregularities and malpractices in parts of society that have been with us too long and I hope those are corrected so that accidents like this will not happen again."
Chung was booed and someone threw a water bottle at him when he visited grieving parents the day after the disaster. President Park was also booed by some relatives when she visited a gym where families of the missing were staying.
Tempers have frayed over the slow pace of the recovery and frequent changes in information provided by the government.
The Gyeonggi Provincial Office of Education sent text messages to parents that "All Danwon High School students are rescued" in the hours after the disaster, media reported.