Karl, 62, led the Nuggets to a team-record 57 wins, including 38 at home. Denver was eliminated in the first round of the playoffs, however, by Golden State.
Nuggets President Josh Kroenke said Karl, who had reportedly been seeking a long-term deal, wouldn't be offered a contract for next season.
"George has been an instrumental part of our success over the past decade and we appreciate everything he did to keep us among the top teams in the Western Conference," Kroenke said. "He is a Hall of Fame coach whose legacy in Denver will last for years to come. George is a legend in the game of basketball and I could not have more respect for him as a person and coach."
The team said a search for a replacement would begin immediately.
Karl was hired by the Nuggets Jan. 27, 2005, and posted a 423-257 record since. Denver qualified for the NBA playoffs each season under Karl.
Karl coached at Cleveland in 1984 and made head coaching stints at Golden State, Seattle and Milwaukee before joining the Nuggets. His overall coaching record is 1,131-756. Only once in his coaching career did his team fail to make the playoffs when he was the coach at the end of the season. That was 2002 when the Milwaukee Bucks were 41-41 on the season.