His departure comes after a poor start to the season for the Essex side who have taken just one point from their opening five matches.
A club statement on their official website read: “Joe Dunne has left his role as first-team manager of Colchester United FC by mutual consent.
"Joe has managed Colchester for two years and has successfully kept the club in League One, despite the large cuts the club made to its playing budget following the introduction of the Financial Fair Play rules that clubs have to abide by.”
Colchester chairman Robbie Cowling added: "Joe has done a remarkable job as manager for Colchester United over the past two seasons and he has been a remarkable servant for the club for many years.
"He is a Colchester United legend and I am grateful for the way he kept our club in League One during these challenging times.
"I wish him all of the very best for the future."
Former Colchester defender Dunne saw his playing career cut short at the age of 29 after a series of knee injuries, but he was retained by the club as a youth-team coach.
The Irishman stepped into the hotseat in 2012 after occupying several different coaching roles, including reserve-team manager and first-team coach under former boss Paul Lambert.
The 41-year-old, who was being assisted by former Charlton and Republic of Ireland midfielder Mark Kinsella, kept Colchester in League One on the final day of last season with a 1-0 win at Walsall.