Hallgrimsson has played a leading role in the progress of the national team, who reached the quarter-finals of the European Championship in 2016 and have just participated at the World Cup.
However, after registering just one point from games with Argentina, Nigeria and Croatia, Hallgrimsson has opted to step down from his role with immediate effect.
A statement on social media read: "The FA of Iceland can now confirm that Heimir Hallgrimsson will not continue as head coach of the Icelandic men´s national team.
"Hallgrimsson steps down as Iceland coach at his own request after 7 years in the job, having joined in 2011."
Iceland had previously never qualified for a major tournament before securing a spot at Euro 2016.