The decision came Thursday after a meeting between general manager Jay Feaster and Sutter, whose contract was to expire at the end of June.
''After discussions with Jay since the season ended, it was in the best interest of the organization and myself to part ways,'' Sutter said. ''I wish the Calgary Flames all the best.''
The Flames missed the playoffs in Sutter's three seasons with the team.
''Brent and I explored many options and ultimately determined that it is best to proceed in different directions,'' Feaster said. ''Brent is a great person and an excellent hockey coach.''
Calgary also announced that the contract of assistant coach Dave Lowry will not be renewed.
The Flames narrowly missed the postseason in all three years under Sutter, compiling a 118-90-38 record overall. Calgary went 37-29-16 this season, second to Vancouver in the Northwest Division.
''It's not an easy day,'' said Feaster. ''It's beyond just the fact that we're both on the page that we need youth and enthusiasm and all those things. The one thing I want to make clear is this is not about fault or blame or finger pointing.''
Sutter's resume also includes a two-year stint with the New Jersey Devils and a seven-year run with the Red Deer Rebels, the Western Hockey League team he continues to own.
He was hired by the Flames in June 2009 when brother Darryl was the GM. Feaster replaced Darryl Sutter in December 2010.
''I don't think there's any question that Brent will coach again in the National Hockey League,'' Feaster said. ''For me personally, one of the best things in the past two years in being in Calgary has been my relationship with Brent. I think he's a very, very good hockey coach.''