The 51-year-old guided the club to the Sky Bet League One title last season and lifted the Johnstone's Paint Trophy at Wembley, but found the going tougher in the Championship.
A run of just one win in 11 league outings had left the Ashton Gate outfit in the relegation zone after 26 matches.
Chairman Keith Dawe told the club's official website: "I brought Steve Cotterill into Bristol City just over two years ago as I believed he could keep us in League One that year and build from there.
"Steve did keep us in the division and went on, in conjunction with the rest of the organisation, to deliver a League One championship and Johnstone's Paint Trophy
That season will live in the memory for a long time.
"Sadly, since the highs of last March and May things have not gone our way on the pitch and Steve has now left the club."
Following the former Nottingham Forest and Portsmouth manager's departure, assistant John Pemberton and under-21 boss Wade Elliott will take charge of the team for Saturday's visit of Middlesbrough.
Dawe added: "I thank Steve Cotterill for all his efforts over the last two seasons
Sadly we haven't managed to push on from last season and the time has come for us to all move forward.
"The club's aspiration is to ultimately become a Premier League club and this decision has been made to achieve our overall strategy for growth and player development."
Source : PA
Source: PA