Darren Ferguson parts company with League 1 Peterboro' after MK Dons defeat
The Posh have won just one of their last five matches in the league, dedspite starting the season as one of the promotion favourites.
In a statement on Peterborough's website, chairman Darragh MacAnthony described Ferguson as "one of the finest managers in our club's history".
"He feels that a new challenge is needed for both himself and the football club," he added.
Ferguson, 43, was in his second spell as Peterborough manager after returning to the club in January 2011 after a poor spell as Preston manager where his sacking prompted Sir Alex Fergsuon to withdraw several manchester loan players from the Deepdale club..
Ferguson junior led Posh to promotion to the Championship via the play-offs that season, but they were relegated on the final day of the 2013 season.
"I'm personally very disappointed in our current league position, the performances from our playing squad and the fact we have dropped way below our own standards we set out at as a football club," MacAnthony said.
"Some fans have questioned my own commitment, interest, investment and passion for this football club recently.
"I am hungrier than ever to get this club back into the Championship and beyond and to deliver on the promises I have made to the city of Peterborough."
During his first spell as Peterborough boss between 2007 and 2009, Ferguson who tatsed success as a player with the likes of Wolves guided them to successive promotions from League Two to the Championship.
Coaches Gary Breen, Gavin Strachan and Jimmy Walker, video analyst Stewart England and sport scientist Marc Lindsey have also left the club, with academy manager Dave Robertson put in caretaker charge.