Sherwood, who took over from Andre Villas-Boas in December, held talks with chairman Daniel Levy on Tuesday before seeing his 18-month contract terminated.
"We appointed Tim mid-season as someone who knew both the players and the club," said Levy.
"We agreed an 18-month contract with a break clause at the end of the season and we have now exercised that option.
"Since appointing Tim as assistant first team coach in 2008 and then as technical co-ordinator in 2010 and head of football development in 2012, we have been supportive of him during football management changes throughout that period.
"On behalf of the club, I should like to state our thanks for all his efforts during his years with us. We wish him great success in his managerial career.
"Moving forward, now the season is over, we shall embark on the process of finding a new head coach. We have a talented squad and exciting young players coming through.
"We need to build on this season, develop our potential and inspire the kind of performances that we associate with our great club."
Sherwood, who has already been installed as the odds-on favourite for the vacant manager's job at Brighton, said: "It is obviously a massive wrench to leave a club of the stature of Tottenham Hotspur, a club very close to my heart."
Sky Sports News revealed in early April that Sherwood was to be sacked at the end of the season and that Tottenham were actively pursuing his successor.
What followed were weeks of reports linking other managers to White Hart Lane, including Louis van Gaal, who is now set to take over at Manchester United, Ajax boss Frank de Boer and Southampton manager Mauricio Pochettino.
De Boer claimed over a fortnight ago that Tottenham had approached Ajax to inquire about his potential availability, while Pochettino refused to be drawn on his future ahead of talks with Southampton on Monday. Sky Bet make Pochettino favourite to take charge at White Hart Lane.
Argentinian Pochettino described their eighth-place finish as "the end of a project", but Southampton are keen for him to sign a new deal with just a year left on his current contract.
However, he says there need to be significant changes to the club's recruitment policy if they are to challenge for Champions League qualification next season.
Sky Sports' Jamie Redknapp thinks Pochettino is the man for Spurs.
Speaking on the Sky Sports End of Season Special, former Spurs midfielder Redknapp expects the club to approach Pochettino if they miss out to Manchester United on top target Van Gaal - but says the Argentine must be allowed to hold on to his best players if he is appointed.
"Van Gaal was their number one choice and now it looks as though they are going to go with Pochettino," Redknapp said.
"I think he is a very good manager. I think Tim has done well, but I don't think they know [their preferred target].
"I think they will be searching around and trying to get the right man because the preferred target was Van Gaal, but he's obviously not going to be available because Manchester United have come in.
"They were talking about experience and that's one of the reasons why Tim won't be still at the club, so if they are going for someone with inexperience of working at a big club you would probably go with Pochettino.
"He's a good manager, but more important than the manager at that club is they've got to get their recruitment right. For the last seven or eight years they've sold their best players - Modric, Bale, Berbatov, Carrick - every time they get a good player they sell them."
Sherwood replaced Villas-Boas as Tottenham chief in December and guided the club to a sixth-placed finish in the Premier League, but has been dismissed within two days of the end of the season.
After what was his final game in charge of Spurs, who finished sixth, Sherwood told Sky Sports: "It's been a great learning curve for me.
"The one thing I have learned about football is that it's all about winning, and if you win it covers up a multitude of sins.
"It's an impulsive game. People who don't know the game make impulsive decisions and that's what they continue to do unfortunately."