Formerly coach of Norwich City, Farke joined Gladbach in the summer of 2022 and led the side to 10th place this season with 43 points, the club's worst season in 12 years.
The club issued a statement on Friday saying after an end-of-season analysis with the former coach, the two decided to finish their working arrangement.
"After several intensive talks, we came to the conclusion with Daniel Farke that we should go our separate ways," sporting director Roland Virkus said on Friday.
"We would like to thank Daniel and his team for the work they have done." Farke, who had a contract at Gladbach until 2025, twice took Norwich City to the Premier League by winning the second division, before immediately being relegated.
German media reports former Bayer Leverkusen manager Gerardo Seoane is the favourite to take over from Farke, but several others including outgoing Frankfurt manager Oliver Glasner and former Southampton boss Ralph Hasenhuettl are also in the mix.
Gladbach won five German titles in the 1970s but have struggled since, the 1995 German Cup being the only piece of silverware since.