The 45-year-old, who was appointed as Andre Villas-Boas' replacement in December, had initially signed an 18-month contract but was fending off speculation about his future almost immediately.
Having led Spurs to a sixth-placed finish and qualification for next season's Europa League, Sherwood leaves with an impressive win percentage of over 59% but with heavy defeats to Manchester City and Chelsea the stand-out results of his spell.
In a statement on their official website, Tottenham chairman Daniel Levy announced they had decided to take the option to end Sherwood's contract a year early and will now begin the search for his successor.
"We appointed Tim mid-season as someone who knew both the players and the club," it read. "We agreed an 18-month contract with a break clause at the end of the season and we have now exercised that option.
"Moving forward, now the season is over, we shall embark on the process of finding a new head coach. We need to build on this season, develop our potential and inspire the kind of performances we associate with our great club."
Sherwood becomes the 12th Barclays Premier League manager to lose his job since the start of the season, with Southampton manager Mauricio Pochettino the favourite to take charge at White Hart Lane.
Pochettino has refused to answer questions about his link to the Tottenham position but intends to hold sit-down talks with the board at St Mary's this week.