The manager led the Terrors to European qualification three seasons in a row but cited the financial constraints limiting the club's ambition as the reason for his departure
Youth Director Stevie Campbell and assistant manager Paul Hegarty are set to take charge for the SPL side’s away game on Tuesday at Motherwell.
The club announced on Monday: "Peter, who recently confirmed he would not be renewing his contract at the club, led Dundee United to Scottish Cup success in 2010 and helped the squad qualify for European football on three consecutive occasions.
"He leaves with the thanks of everyone at the club and best wishes for the future."
After stepping up from his position as assistant manager mid-way through the 2009-10 when Craig Levein was appointed Scotland national team coach, Houston led the Terrors to third place in the SPL, followed by consecutive fourth placed finishes and qualification for the Europa League.
The club have picked up just one win in their last eight matches however and currently lie seventh in the table, while their former manager was recently linked with the vacant managerial post at Championship side Blackpool.
For his part, Houston cited how financial limits from the board have led to player sales and the restraint of his ambition at the club, and told reporters: "I want to be part of a successful Dundee United but I have my concerns.
"My concerns are the fact that we have to compete on the pitch. There is only so much you can do if you continue to cut.
"I'm the first to understand that the club has to cut, they can't afford to keep going on. The Thompson family isn't a bottomless pit. The chairman and directors have to look after the financial side.
"Me, as a football person, wants the best team on the pitch."