Their poor form continued when they suffered a 3-1 home defeat to Reading at Oakwell and the two parties have agreed to go their separate ways.
A club statement read: "It is with regret that Barnsley Football Club and first team manager Simon Davey have tonight mutually agreed to part company.
"We would like to place on record our sincere thanks for all the hard work Simon has put in during his two-and-a-half tenure as manager and wish him every success in the future."
Davey was appointed to the Oakwell hotseat in November 2006 and helped guide the club to the FA Cup semi-finals in 2008, beating Liverpool and Chelsea before eventually bowing out to Cardiff at Wembley.
The club had a disappointing campaign last season, narrowly avoiding relegation back to League One, and despite an impressive pre-season and being given money to spend, Davey has now left the club.
After the home defeat to Reading, the home fans turned on Davey and demanded his dismissal but in his post-match conference, Davey gave no hint that his departure was imminent.
"We are as disappointed as them (the fans). We don't like losing. I am there with their frustration," he said.