Red Bull was 12-11-7 in 2007 but was eliminated Saturday in the first round of the playoffs by New England. The team was 16-16-10 overall under Arena.
"We've made progress this season, but it is not where we want to be," Red Bull Managing Director Marc de Grandpre said Monday. "We made a promise to our fans to provide the best quality product on the field. Unfortunately, we haven't achieved that promise to this point. Thus, we've come to a mutual agreement to part ways."
Arena said he and de Grandpre "decided mutually that this was the best move for Red Bull New York.
Arena has a 77-51-10 regular-season record in coaching Red Bull and D.C. United. He also coached the U.S. team in the 2006 World Cup.