Babbel, 39, said on Saturday that he had informed officials last month he would not extend his contract past the off-season while the club responded that they had found out only a few days ago.
"The latest developments, especially in the last two days, have left us no choice," said general manager Michael Preetz on the club's website.
"Under these circumstances, it is no longer possible to work together in an atmosphere of mutual trust."
Babbel, whose side won the second division title last season, said on Saturday that he had told the club of his intentions during the November international break.
The former Bayern Munich, Hamburg SV and Liverpool player was previously coach at VfB Stuttgart, the club where he ended his playing career.
He is the fourth coaching victim of the Bundesliga season following two at Hamburg SV and Ralf Rangnick's resignation at Schalke 04. Hertha are 11th in the table.
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