The 68-year-old leaves after Portugal suffered a shock 1-0 quarter-final defeat to Morocco at the World Cup.
Santos spent eight years in charge of Portugal, guiding the team to victory at Euro 2016, as well as the inaugural Uefa Nations League in 2019.
However his final games were dominated by his decision to drop Cristiano Ronaldo for the knockout matches at Qatar 2022.
Santos chose to drop the 37-year-old before the last-16 meeting with Switzerland, following Ronaldo's negative reaction to being substituted during the final group game against South Korea.
Portugal won the game against Switzerland 6-1 - Ronaldo's replacement, Goncalo Ramos, scoring a hat-trick - but were stunned in the last eight as Morocco became the first African nation to reach the World Cup semi-finals.
The Portuguese Football Association (FPF) said: "The FPF thanks Fernando Santos and his technical team for the services provided over eight unique years and believes that this thanks is also made on behalf of the Portuguese people.
"The FPF Board will now start the process of choosing the next national coach."
Jose Mourinho is among the favorites to become the next Portugal manager.