Goodwillie was ruled to have committed rape by a civil court judge in 2017 and many reacted angrily to his arrival at the Scottish Championship club on Monday.
The Rovers initially stood by their decision despite criticism, resignations, sponsors pulling out and fans ripping up season tickets - but now the club have made a dramatic U-turn.
Chairman John Sim apologised to everyone connected to the club in a lengthy statement and confirmed his plan to rip up Goodwillie's four-year contract.
Sim said: "I firstly want to apologise wholeheartedly to our fans, sponsors, players and the wider Raith Rovers community for the anguish and anger caused over the past few days.
"We got it wrong.
"In reaching our original decision, we focused far too much on football matters and not enough on what this decision would mean for our club and the community as a whole.
"Over the past couple of days, we listened carefully to the fans who have got in touch and I'm very grateful for their honesty. As chairman, as a board and as a management team, we have all learned a hard but valuable lesson.
"This very unfortunate episode is something that we all bitterly regret and we are now wholly committed to making things right. I can therefore confirm that, following a meeting of the Raith Rovers board, the player will not be selected by Raith Rovers and we will enter into discussions with the player regarding his contractual position.
"We share a desire to do what is best for our club and will be doing everything in our power to regain the trust and confidence of the Raith Rovers family."
What happened?
Raith Rovers signed Goodwillie from Clyde with the 32-year-old handed a four-year contract.
At a civil case at the Court of Session in Edinburgh in 2017, Goodwillie and his former Dundee United teammate David Robertson were ordered to pay damages of £100,000 to a woman they had raped in 2011, a judge ruled.
No criminal charges had been brought against either of them.
The former Blackburn and Aberdeen striker left Plymouth in the wake of the ruling and has played for Clyde in Scotland's lower two divisions since then, hitting 109 goals in 176 appearances.
Reaction
The news was met with immediate backlash. The club's supporter liaison officer, Margie Robertson, resigned from her post and stated her values and those of the club were on a 'divergent path'.
Former chairman Bill Clark and Andrew Mill both quit the club's board.
Renowned novelist Val McDermid, a former Raith director whose name adorns the club's home shirts, had warned against the signing several weeks ago.
She wrote on Twitter: "I have this morning ended my lifelong support of Raith Rovers over their signing of the rapist David Goodwillie.
"I have cancelled next season's shirt sponsorship over this disgusting and despicable move. This shatters any claim to be a community or family club.
"Goodwillie has never expressed a shred of remorse for the rape he committed. His presence at Starks Park is a stain on the club.
"I'll be tearing up my season ticket too. This is a heartbreaker for me and many other fans, I know."
In a later post on social media, she added: "The thought of the rapist David Goodwillie running out on the pitch at Starks Park in a Raith Rovers shirt with my name on it makes me feel physically sick."
The captain of the club's women's team, Tyler Rattray, announced she was quitting playing for the team.
In a tweet, she said: "After 10 long years playing for Raith, it's gutting I have given up now because they have signed someone like this and I want nothing to do with it!"
First Minister Nicola Sturgeon praised McDermid and Rattray's 'principled' responses and added: "But the fact they're in this position at all reminds us that our society still has a way to go to make zero tolerance of sexual violence a reality."
Two of the clubs sponsors also decided to pull their support.