His departure is by mutual consent after he expressed unhappiness in the role and media reports said club owner and Italian Prime Minister Silvio Berlusconi was less than impressed with the rookie coach's tactics.
"We mutually announce that we are parting," the Brazilian told a news conference. "It was a mutual choice made in a calm way. Our paths are separating but friendship and respect remain."
His last game as coach will be Saturday's final Serie A match of the season at home to Juventus which will confirm Milan's third-place finish.
Club chief executive Adriano Galliani said no decision had been taken over Leonardo's replacement.
"Milan have not contacted anyone, there is time. It's not a decision to take in a few days, we will take much longer," he said.
TASSOTTI KEEN
Assistant coach Mauro Tassotti has said he would be interested in taking over while Galliani has talked glowingly about youth team boss Filippo Galli and former Cagliari coach Massimiliano Allegri.
Former Milan striker and Netherlands coach Marco van Basten said earlier this week an ankle injury would stop him being an effective coach for the time being.
World Cup winner Leonardo, Milan's former technical director, took over at the end of last season despite having no coaching experience when Carlo Ancelotti left for Chelsea.
Milan fans saw his appointment as a cheap gamble given owner Berlusconi has been belt-tightening during the economic crisis, selling Kaka to Real Madrid but making modest signings.
Leonardo, a former Milan player, strongly hinted at his departure recently when he said his relationship with Berlusconi was possibly "incompatible."
Galliani also said the 40-year-old was keen to return to Brazil to be with his children.
The coach said he had no future plans, dashing speculation he is a candidate for the Brazil national job.
"I didn't know what it meant to be a coach, it's been an extraordinary experience but I don't know if I will do it again in the future, definitely not for the next few years," he said.
Milan, who lifted their seventh European Cup under Ancelotti in 2007 but have not won the Italian title since 2004, have had an inconsistent campaign which included a last 16 defeat to Manchester United in the Champions League.
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