Competition from social networking including Facebook and MySpace has left behind Bebo which has been a hit in the UK but slumped elsewhere.
The company will close the site, which is targeted at teenagers, or sell it by the end of May.
AOL said in a memo sent to staff: "Bebo, unfortunately, is a business that has been declining and, as a result, would require significant investment in order to compete in the competitive social networking space."
The company said it could not "further fund and support Bebo in pursuing a turnaround in social networking."
AOL split with Time Warner last year and is fighting a battle against rival internet companies in the fiercely competitive sector.