Sven-Goran Eriksson left Manchester City on Monday, less than a year after taking over as coach of the Premier League club.
A statement on the side's Web site (www.mcfc.co.uk) said the 60-year-old Swede had parted company with the club by mutual consent.
Former Manchester United striker Mark Hughes is favourite to replace Eriksson after Blackburn Rovers confirmed later on Monday that they had given permission for their manager to talk to City about the vacant post.
Eriksson's future had been in doubt for several weeks after a disappointing end to the season.
"The Board of Directors and all at Manchester City would like to thank Sven for his efforts and contributions throughout the season and we wish him all the best for the future. Sven remains a friend of the club," Manchester City chief executive Alistair Mackintosh said in a statement.
Despite steering City to a creditable ninth place in the Premier League, the former Benfica, Lazio and England coach had come under pressure from Thai owner Thaksin Shinawatra.
His last competitive game in charge was an 8-1 humiliation at Middlesbrough on the last day of the season but despite that result Eriksson remained popular with the fans.
"I have enjoyed my time at Manchester City very much indeed and in particular, I would like to thank the fans, players and staff for their amazing support over the season," Eriksson said in a joint statement.
"I wish the Club, and everyone associated with it, much success in the coming years."
Eriksson, the first foreigner to coach England, was appointed by City last July, shortly after former Thai Prime Minister Thaksin gained enough shares to takeover the club.
It was his first job since he left his England post after the 2006 World Cup in Germany and his first club job since leaving Lazio in 2001.
Eriksson, who replaced former England defender Stuart Pearce, immediately began a spending spree designed to restore City as a force in English football.
The new recruits included Brazilian midfielder Elano Blumer, Croatia defender Vedran Corluka and Spanish fullback Javier Garrido, as well as Bulgarian winger Martin Petrov and Italian striker Rolando Bianchi.
Despite so many signings, the new-look side gelled quickly and began the season in style, beating West Ham United away on the opening day and briefly topped the table after defeating city rivals Manchester United at home.
City continued challenging for a place in the top four thanks to winning their opening nine home league games but their form began to tail off at the start of 2008.
Nevertheless they completed the double over Manchester United in February with a 2-1 victory at Old Trafford, City's first win there for 34 years.
Just weeks after that victory, however, doubts about Eriksson's future began to surface after Thaksin was said to be frustrated at City's failure to maintain their form.
In May, Portuguese media reported that Eriksson was in talks about a return to Benfica while his agent was quoted as saying it was unlikely he would still be at City next season.
After City's 8-1 defeat at Middlesbrough on May 11, Eriksson called for talks with the club's owners to discuss his future, although he remained in charge of the team during a post-season tour to Southeast Asia.
(Reporting by Martyn Herman; Editing by John O'Brien)