Houston had been in talks with the Tannadice side over a new deal but last week decided against extending his contract on reduced terms.
Initially it was announced he would stay on until the end of the season but he has now departed following Saturday's 1-1 draw with Ross County.
The 54-year-old was granted permission to speak to Blackpool recently but does not appear to be in the running for the vacancy at the Championship club.
Houston stepped up from his role as assistant to Craig Levein when he left to take over as Scotland manager in December 2009. He led United to the Scottish Cup in May 2010.
United released a statement saying: "Dundee United today announced that Manager Peter Houston had left the Club by mutual consent.
"Peter, who recently confirmed he would not be renewing his contract at the Club, led Dundee United to Scottish Cup success in 2010 and helped the squad qualify for
"European football on three consecutive occasions. He leaves with the thanks of everyone at the Club and best wishes for the future."