Chairman Dejphon Chansiri told the club’s website: “This is not a decision I have taken lightly but one that I believe is in the best interests of our club ahead of the 2015/16 season.
"The club will be taking a new direction next season and it is my belief that the appointment of a new head coach will help achieve my desire of bringing Premier League football back to Hillsborough.
“I would like to thank Stuart for his hard work and diligence on behalf of Sheffield Wednesday and wish him all the very best moving forward.”
Wednesday were taken over by Thai businessman Chansiri in March after he paid £30m and he outlined his plan to take the Owls back to the Premier League within three years.
He initially gave his backing to Gray, who delivered Wednesday's best finish since 2009, but has opted to go in a different direction.
Former Wednesday players Dan Petrescu and Benito Carbone have both been linked to the role, while Glenn Roeder, who was appointed on a three-man sporting director committee in April, may also be in contention.
That three-man committee, which consisted of Gray and Adam Pearson, now only consists of Roeder after Pearson left for a similar position at Leeds shortly after his appointment.
The Owls have not been in the Premier League since their relegation in 1999-2000
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