The German coach, who won back-to-back league and cup doubles during his time with Bayern Munich, became the third high-profile managerial casualty in a matter of weeks in China, following the departures of Luiz Felipe Scolari and Andre Villas-Boas.
Shangdong Luneng revealed that the 64-year-old former Germany international's contract would not be renewed, but paid tribute to Magath.
In a statement, the club said: "Since taking office, Mr Magath has further enhanced the team's desire, training level and performance through his effective and fruitful work.
"Mr Magath won the club's respect and the fans' hearts by his rigorous attitude to work and his dedication."
Magath led Shangdong to a sixth-place finish this season.