The former flanker has seen the Liberty Stadium side win four Guinness PRO14 games this season and his last match in charge was Saturday’s 24-7 Champions Cup defeat to Clermont Auvergne.
Managing Director of Ospreys Rugby, Andrew Millward, said: “Steve has been an outstanding servant to Ospreys rugby – often in challenging circumstances.
“His dedication to the region and his hard work has been absolute.
“However, we’re aware results have not been good enough this season and that, regrettably, a change is necessary to keep the organisation moving forward – consistent with the long-term expectations of our loyal and valued supporters and commercial partners.
“In line with this, we will also continue to closely review our entire rugby operation during the coming weeks.”
Tandy helped the Ospreys to PRO12 title success in his time in charge.
But his departure means the Swansea-based region are now on the lookout for a new boss.
“This is not a decision that has been taken lightly,” Millward added.
“Steve has been an integral part of everything we have achieved over the last six years – from winning the PRO12 in his first season in charge to helping develop a strong core of players from our academy – and before that as a player.
“Steve will always remain a respected figure within the Ospreys family and will always be welcomed back to Liberty Stadium as a true friend of the region. We wish him every success for the future.
“While our long-term focus is now on finding a world-class replacement and continue building a squad for next season, we have a busy end of season Guinness PRO14 run-in for the coaches and players to focus on.”