Kelly has reunited himself with Billy Davies following the Scot's appointment as new Nottingham Forest boss, with the pair having worked together previously at the Championship club.
Kelly, a former Saddlers striker during his playing days, was selected by Walsall manager Dean Smith ahead of a large pool of high-calibre applicants following Richard O'Kelly's move to Bristol City last month.
But Smith will now have to return to that shortlist after Kelly cut short what was an initial deal until the end of the season.
A statement on Walsall's official website read: "Kelly's short-term deal was always on the proviso that, should Billy Davies be appointed into a managerial position, he would be given the option to discuss linking back up with his former boss.
"Davies has on Thursday been reappointed manager at Forest and Kelly, who has worked under the Scot at Preston, Derby and during their previous spell together at the City Ground, has accepted the position as assistant manager.
"The club would like to wish David well in his new role and thank him for his efforts during his short spell. The process of finding a replacement is now underway."