Alfaro, 51, had been in charge since 2010 in his second stint with the Argentine club and planned to quit at season's end.
While he has led Arsenal into the Copa Libertadores knockout stages for the first time, they are bottom of the Argentina Primera Division with just one win in 10 league matches.
"Gustavo Alfaro has ceased to be Arsenal coach and this evening he will bid farewell to the squad," Arsenal said in a statement.
"Last Thursday, at a news conference, the trainer had announced he did not intend renewing his contract at the end of the season."
Alfaro led Arsenal to Copa Sudamericana glory in 2007 and to the 2012 Clausura title in his second spell in charge, while also claiming the 2012-13 Copa Argentina and 2012 Supercopa Argentina.
Arsenal host Chilean outfit Union Espanola in the first leg of their Copa Libertadores tie on April 24.
