The Scot leaves London Road after a return of just five points from a possible last 15, which has seen their early title challenge peter out.
They sit 15th in the third tier, eight points above the relegation zone.
Chairman Darragh MacAnthony - who has taken to Twitter to cricitise the squad in recent months - explained in a statement: "It saddens me to say that the club has this evening parted ways with one of the finest managers in our club's history.
"After Speaking with Darren, he feels that a new challenge is needed for both himself and the football club.
"I'm personally very disappointed in our current league position, the performances from our playing squad and the fact that we have dropped way below our own standards that we set out at as a football club.
"There is plenty of young and experienced talent in this squad and with 14 games left in the season, I have personal expectations that our players will all lift their performance levels to match the incredible passionate performance and display by nearly 2000 Posh fans today when we were 3-0 down at Stadium MK.
"I won’t stop until we are scoring goals for fun, entertaining our fans, building our fan base and winning promotions once more with a young exciting vibrant squad."
