Baker, who managed Cincinnati for six seasons, had led the Reds to the playoffs three of the past four years but each time failed to clear their first hurdle.
"This was a very difficult decision to make," president of baseball operations and general manager Walt Jocketty said.
"Dusty played an important role in the recent success of this organization, and we thank him for his contributions during his time here. We feel a change is necessary, however, if we are to continue to move the organization forward."
Baker, who managed the San Francisco Giants to the National League pennant in 2002 and directed the Chicago Cubs to the NL Central Division title in 2003, steered the Reds to NL Central titles in 2010 and 2012.
The 64-year-old Baker, a former major league outfielder who began his managerial career in 1993 with the Giants, is ranked 16th all-time and second among active managers with 1,671 wins, and three times was named Manager of the Year.
Baker guided his teams to seven postseasons, including the 2002 World Series with the Giants, who lost to the Angels in seven games.
He compiled a record of 509-463 record for the Reds, who stumbled toward the end of the 2013 season and were swept in the final three games at home by the Pirates to finish at 90-72 before losing to Pittsburgh in the wild card showdown.