Farrell, who managed the Red Sox since 2013, will not return for the 2018 season, president of baseball operations Dave Dombrowski announcement. The team said a search for a new manager will begin immediately.
"I thought it was the appropriate time to make a change for the betterment of the organization moving forward," Dombrowski said at a news conference. "You weigh a lot of different things to come into play. You watch day in, day out over a season. You come up with a decision based upon that. And for me, at this point, sometimes change can be better. That's why we've decided to move forward with the change."
Farrell, 55, was 432-378 (.533) in five seasons, leading the Red Sox to the World Series title in 2013. He was under contract through the end of the 2018 season.
The Red Sox were eliminated from the playoffs on Monday, losing to the Houston Astros 5-4 in Game 4 of the American League Division Series.
Dombrowski met with Farrell on Wednesday morning to inform him of the decision.
"I want to start by thanking John Farrell for what he has done for the Boston Red Sox organization over the years," Dombrowski said.
Boston finished 93-69 (.574) in 2017 to win its ninth AL East division title. The Red Sox had the third-best record in the American League, tied for fifth best in the majors.
During his Red Sox tenure, Farrell's teams won three division titles (2013, 2016, 2017). His 432 managerial wins and 810 games managed both rank sixth in club history, and he is the only manager ever to lead the Red Sox to consecutive division titles.
Farrell's first season in 2013 was highlighted by Boston's eighth World Series championship.
Farrell began his major league managerial career with the Toronto Blue Jays in 2011, leading the team to a 154-170 record over two seasons. In his seven full seasons as a manager, his clubs went 586-548 (.517).
Farrell's first professional coaching stint began with Boston in 2007 when he spent four seasons as pitching coach. Over that four-year span, the Red Sox had three postseason appearances (2007-09), including the 2007 World Series title.