The 52-year-old former City midfielder was among the favourites to become the club's new manager after Neil Adams quit earlier this month.
But the Canaries instead made a surprise appointment by bringing in Alex Neil from Hamilton.
A statement on City's official website read: " Following an approach by Mike to the club, City can confirm first-team coach Mike Phelan has left the club after his contract was terminated by mutual consent
"Mike, a Canary hall of fame member and former captain of Norwich City, leaves with the very best wishes of everyone at the club for the future.
"Gary Holt will continue as first team coach, with new boss Alex Neil recently confirming his backroom team will be further boosted by the arrival of Frankie McAvoy from Hamilton Academical at the end of the month."
Source : PA