Ruutli, who also managed Estonia between 1999 and 2000, has led Estonia's national team for the past six years.
The highlight of the 59-year-old's tenure came when Estonia reached the UEFA Euro 2012 play-offs, but they lost to the Republic of Ireland 5-1 over two legs.
Estonian FA (EJL) president Aivar Pohlak said in a statement: "We made this decision after last Friday's friendly against Azerbaijan (a 2-1 win).
"I want to state that Tarmo is the most successful head coach in Estonia's history. We produced some beautiful performances, played some great matches and delivered some unbelievable results in UEFA EURO 2012 qualification.
"Six years is a long period of time. We decided he should leave now, but we don't exclude the possibility of continuing our relationship in future.
"We thank Tarmo for his work and will present him a golden plaque at Sunday's EJL gala event."
Estonia, who won just two of their 10 FIFA World Cup qualifiers, ended Ruutli's tenure on a high by triumphing 3-0 in Liechtenstein on Tuesday.
