The former Candystripes captain replaced Roddy Collins as Brandywell boss in May last year.
Derry are battling against relegation from the Premier Division while they made their FAI Cup exit on Monday night with a 3-0 defeat at Cork City.
City assistant boss Paul Hegarty will take over as caretaker manager until the end of the season.
The 42-year-old, who was City's longest serving player, took Derry to last season's FAI Cup final.
However, Derry have won just six of their 27 league games this season and are just three points clear of basement side Limerick.
Hutton's final match in charge came on Monday in the quarter-final replay loss at Turner's Cross.
"The Derry City FC Board Of Directors would like to announce that Peter Hutton has left the club by mutual consent," said the Candystripes.
"Derry City FC would like to thank Peter for his service, and we wish him well for the future."
Derry City have parted company with manager Peter Hutton by mutual consent after a poor league campaign.