His departure is by mutual consent after he expressed unhappiness in the role and media reports said club owner and Italian Prime Minister Silvio Berlusconi was less than impressed with the rookie coach's tactics.
"We mutually announce that we are parting," the Brazilian told a news conference. "It was a mutual choice made in a calm way. Our paths are separating but friendship and respect remain."
His last game as coach will be Saturday's final Serie A match of the season at home to Juventus which will confirm Milan's third-place finish.
Club chief executive Adriano Galliani said no decision had been taken over Leonardo's replacement.
"Milan have not contacted anyone, there is time. It's not a decision to take in a few days, we will take much longer," he said.
World Cup winner Leonardo, Milan's former technical director, took over at the end of last season despite having no coaching experience when Carlo Ancelotti left for Chelsea.
Leonardo, a former Milan player, strongly hinted at his departure recently when he said his relationship with Berlusconi was possibly "incompatible."
"I didn't know what it meant to be a coach, it's been an extraordinary experience but I don't know if I will do it again in the future, definitely not for the next few years," he said.
