Withdraw manuscript from peer review after finding a major error
There are two parts to your question:


  
  How to broach the matter with your colleagues.
  How to withdraw your paper from review.
  


The trickier issue is how to broach the subject with your colleagues. If you feel there is absolutely no way for you to finish the revisions on schedule, then you owe it to your co-authors to tell them of the problem. However, this should be a dialogue, not a unilateral decision. They may see the issue as being less onerous timewise, and that it may be possible to finish the work within a reasonable period of time. Or they may agree with you that withdrawal is the best option. In either case, it should be a team decision, and once that's made, you can proceed with notifying the journal.

Notifying the journal is the simpler issue to handle. Most journals usually set a timeline for submitting major revisions. Just send the journal a note stating exactly what you wrote above. There is nothing wrong with independently withdrawing a paper because of significant errors. (Better that you do so now than need to retract it because of errors later on!)