Kidney led Ireland to a first Six Nations grand slam in 61 years in 2009 but his side won just one game in this year's championship, narrowly avoiding a first wooden spoon since a whitewash in 1998 by finishing ahead of France on points difference.
He will leave the job immediately and assistant coach Les Kiss will lead the team on their June tour of North America while the IRFU look to appoint a successor ahead of a November test series that will include the visit of world champions New Zealand.
"We would like to sincerely thank Declan for his commitment to Irish Rugby. His contribution and involvement across the spectrum of Irish rugby epitomises his passion, belief and commitment to the game," IRFU chief executive Philip Browne said in a statement.
"With a host of new and emerging talent at every level, and despite the clear challenges ahead, we are confident of securing another world-class coach to work with this talented and ambitious group of players."
Kidney, 53, was given the Irish job after guiding his native province Munster to two Heineken Cup triumphs in 2006 and 2008. He had also coached Ireland youth teams and been assistant to his predecessor Eddie O'Sullivan during the 2003 World Cup.
Inheriting a team who had won three triple crowns and included Brian O'Driscoll, Paul O'Connell and Ronan O'Gara, the former school teacher delivered a grand slam in his first season in charge.
However, his talented side never threatened the heights reached when a late O'Gara drop goal captured the elusive slam and Ireland failed to win more than three matches in each of the following four Six Nations campaigns.
Ireland surprised Australia with a stirring win in the 2011 World Cup group stages but bowed out of the tournament in the quarter-finals after a limp performance against Wales, a defeat that was followed by a mediocre 18 months.
The Cork-born coach was cruelly hit by injuries during this year's championship but was also criticised for not blooding younger players sooner. His side were hapless in defeat in Scotland and thoroughly outplayed in a first Six Nations loss to Italy.
Former Australia assistant coach Ewen McKenzie, who has said he will leave the Queensland Reds at the end of this season, is favourite to become the next Ireland coach, according to Irish bookmaker Paddy Power.
Kiss, Leinster boss Joe Schmidt and former South Africa World Cup winning coach Jake White are also in the frame, the bookmaker said.
