The Brazilian will leave by mutual consent following Saturday's final game of the season against Juventus after an average campaign where the Rossoneri finished third in Serie A and went out at the last 16 stage of the Champions League.
He had never coached before and his appointment to replace Chelsea-bound Carlo Ancelotti last May was another indication of cost-cutting by owner Silvio Berlusconi.
NEWS:Leonardo confirms AC Milan exit
Chief executive Adriano Galliani acknowledged that making the former technical director the coach did save money.
Despite the sale of Kaka to Real Madrid which almost balanced the books for the year, few funds were made available for buys and media reports said this was one of the reasons Leonardo became disillusioned.
"There's nothing surprising, it's all very clear, today as always. We have arrived at the end," the 40-year-old candidly told a news conference on Friday having previously said his relationship with Berlusconi was "incompatible".
But if the names in the frame to replace Leonardo are anything to go by, the Italian prime minister is unlikely to be splashing the cash on a highly-paid and famous coach to boost his club despite the slight pickup in the world economy.
Assistant coach Mauro Tassotti, youth team boss Filippo Galli and former Cagliari coach Massimiliano Allegri have been mentioned as possible candidates for the job, not least by Galliani himself.
Milan supporters are not enamoured with the list of potential coaches, especially after former Rossoneri hero Marco van Basten said an ankle injury would prevent him from coaching in the near term.
WIDER PROBLEM
Experts agree Milan will continue to keep a close eye on the purse strings even if their ageing team is again unlikely to be competing for top honours next season.
"I don't think the departure of Leonardo will have much impact. There's still work to do. They've got to be sustainable," Giovanni Palazzi, president of Italy-based sports business consultancy Stage-Up, told Reuters.
Milan's seventh European Cup triumph in 2007 seems a long time ago for fans and if not enough big name players or promising youngsters arrive during the transfer window their gates could continue to decline.
However, it is not just Milan finding it difficult to attract the top talent like they did in the 1990s.
Juventus, another former Serie A powerhouse, will finish seventh this season and Inter Milan's success in reaching the Champions League final is as much down to the brilliance of coach Jose Mourinho as the club's spending or pulling power.
"There's a wider problem in Italian football, the problem is not just Milan's," Sean Hamil, lecturer at the Department of Management at Birkbeck College London, told Reuters.
The continued fallout from Italy's 2006 match-fixing scandal is an issue, alongside the fact Italian clubs miss out on revenue compared to E
