Tully led the Cornish club to fourth in National League South this season, their highest finish.
Last month chairman Peter Masters said Tully was offered a new contract on the condition that a replacement was found for departed assistant Wayne Carlisle.
The ex-Torquay and Exeter defender had expressed his "disappointment" that his Truro future was not sorted sooner.
"The club has always seen the manager role as closely tied to that of the first team coach and believes that it is essential to have a strong team in place," said a club statement.
"The departure of coach Wayne Carlisle at the end of the season meant the dissolution of the current team.
"It has not been possible to find a replacement acceptable to the club within the required timescale.
"An announcement on a new manager-coach team will be made in due course."
National League South side Truro City will appoint a new manager after opting not to renew Steve Tully's deal.