Reports emerged over the weekend that Shiels' two-year tenure at Rugby Park was over and confirmation of his departure on Tuesday came as no surprise after a club spokesman had admitted his job was "under review".
Killie finished ninth in the Scottish Premier League but a four-match ban handed to Shiels last week following outspoken media comments - two of which were suspended - also influenced the decision to part ways.
A club statement released on Tuesday read: "The club thanks Kenny for his services over the last three years, firstly as assistant to Mixu Paatelainen, thereafter as interim manager and subsequently as manager.
"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.
"A difficult relationship with the Scottish FA resulted in several touchline bans and recent comments regarding a fellow SPL club and the Scottish FA Judicial Panel incurred a further suspension which would have seen Kenny commence next season in the stand, rather than the dug-out.
"As a result, the club was also prosecuted by the Judicial Panel's Compliance Officer at a hearing on 6 June and will discover the penalty to be imposed on 21 June.
"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."
Shiels landed himself in trouble after claiming Celtic were "the monster of Scottish football" following a spat with Neil Lennon, after the Celtic boss bemoaned the fact none of his players had been nominated for the PFA Scotland player of the year award.
Shiels said at the end of April: "They have got a massive influence in the judicial panel and things like that, decisions that's made. Celtic are the monster of Scottish football."
He was accused of both bringing the game into disrepute and not acting in the best interests of football by making comments that "call into question the impartiality of the Judicial Panel and the integrity of another member club of the Scottish FA".
Kilmarnock were also found guilty of failing to ensure that Shiels complies with SFA protocol, with their penalty to be decided later in the month.
The penalty for Shiels came less than six months since he was banned for four matches for accusing fourth official Andrew Dallas of "fabrication" of evidence.
Dallas was fourth official when Shiels was dismissed during a match against St Johnstone in November.