The departure of the 57-year-old Northern Irishman comes as no surprise following days of speculation about his future.
Killie finished ninth in the Clydesdale Bank Premier League but a four-match ban handed to Shiels last week following outspoken media comments - two of which were suspended - was also taken into consideration by the club.
The statement read: "The club thanks Kenny for his service over the last three years, firstly as assistant to Mixu Paatelainen, thereafter as interim manager and subsequently as manager.
"His tenure as manager was marked most notably by the club's League Cup success in March, 2012 and his place in the club's history is thereby assured.
"Back to back victories over Rangers in season 2011-12 and a historic win at Celtic Park in season 2012-13 will live on in the memory of the Club's supporters.
"Kenny's work ethic and his determination to introduce young players into the first team were evident throughout his time with the Club.
"Unfortunately season 2012-13 saw the Club exit the League Cup at the first hurdle and go on to record our poorest home record since season 1980-81, culminating in seven matches without a victory at Rugby Park to exit the Scottish Cup and miss out on the 'top six' and then drop to ninth place with five defeats in our final six SPL fixtures.
"For these reasons, both footballing and regulatory, it was mutually agreed that his contract as manager should end. The club wishes Kenny every success in the future and thanks him for delivering the League Cup to Rugby Park in 2012."