The Romanian joined the club in August 2012 on a three-year deal, helping them turn around a dismal start to the season and eventually finish seventh.
However, results have lacked consistency this campaign and a 4-0 defeat to bottom club Anzhi Makhachkala at the weekend signalled the end of the road for Petrescu, with the club eight points behind leaders Lokomotiv Moscow.
A statement on Dinamo's website read: "A team meeting was held on Tuesday and, as a result, the club has announced the termination of Dan Petrescu's contract by mutual consent."
Sporting director Guram Adzhoev said of the former Chelsea defender: "Last year, Dan pulled the team out of a difficult position and took us to a certain level, but recently that progress has stalled. We need to move forward.
"We thank Petrescu for his work and wish him good luck in his future career."
Adzhoev also announced that talks are under way with former Spartak and Lokomotiv coach Stanislav Cherchesov, adding: "Hopefully, we will be able to present him as the head coach in the near future."