The news comes as no surprise after overnight rumours suggested that Davies, 49, was on his way out, with Neil Warnock expected to be announced as his replacement until the end of the season.
Forest announced Davies's departure on their website this afternoon, adding that a further announcement, likely to be concerning Warnock, would be made in "due course".
"The club thank Mr Davies for his efforts during his second spell as manager since his re-appointment in February 2013 and wish him well for the future," read the statement.
Forest had been in the Championship's playoffs for most of the season but dropped out of the top six following Saturday's 5-0 thumping by arch rivals and fellow playoff hopefuls Derby County.
Davies first took charge of Forest for two-and-a-half years between 2008 and 2011, not taking another job before he was re-installed at the City Ground just over a year ago.
Warnock has been without a job since being sacked by Leeds United in April last year. The 65-year-old could be appointed as interim manager by the time Forest welcome Charlton Athletic for a league game tomorrow night.