Dillon became first-team coach under former boss Alan Pardew, while Downes joined the Royals in 2004 to link-up with Steve Coppell.
However, following Coppell's resignation after the Royals' play-off defeat to Burnley on Tuesday, both coaches have left the club.
Director of football Nick Hammond said: "Kevin and Wally have both done a terrific job for Reading Football Club and played an integral part in Steve Coppell's management team."
Chairman John Madejski added: "I'm saddened to see both Kevin and Wally leave, but this is the end of an era and a time for change.
"I will miss Kevin on a personal level because he's a great character who had been with us for a long time, and I wish him every success in the future.
"Wally played a key role in our progress over the last few years; he's a big personality and I'm sure he'll reappear in the footballing fraternity somewhere very soon."