Baker, 64, managed the Reds for six years, this past season finishing third in the NL Central but qualifying for the playoffs with a 90-72 record.
However, Cincinnati lost three consecutive games at home to Pittsburgh with home field in the wild-card game at stake and then was beaten by the Pirates in the wild-card game and eliminated.
"This was a very difficult decision to make," Reds General Manager Walt Jocketty said Friday. "Dusty played an important role in the recent success of this organization and we thank him for his contributions during his time here.
"We feel a change is necessary, however, if we are to continue to move the organization forward."
The Reds made the playoffs three of the last four years, losing in the NL Division Series in 2010 and 2012 before this year's wild-card defeat. In 2012, when the Reds won 97 regular-season games, Cincinnati was up 2-0 on the San Francisco Giants in the NLDS but lost the next three games. The Giants went on to win the World Series.
Cincinnati had a 509-463 record under Baker. The win total is the third-most in franchise history behind Sparky Anderson (863) and Bill McKechnie (744).
Baker previously managed San Francisco (1993-2002) and the Chicago Cubs (2003-06). His overall record is 1,671-1,504 with seven playoffs appearances in 20 years as a manager. His 1,671 wins is 16th most all-time in the major leagues.