"We regret his choice but respect his decision," the club said on their official website.
"We thank him greatly for his important contributions towards the project of building a top European club in Paris and wish him all the best for his future career choice."
The transfer window in France closes on August 31.
The former Brazil midfielder, who finished his playing days at AC Milan in 2003, joined PSG in July 2011 on what he called an indefinite contract after Qatar Sports Investments (QSI) took over the club, and was tasked with reshaping the squad.
He had stunned former club Inter by leaving as coach after just six months, having also quit as AC Milan manager following a one-season stint, but vowed to stay for the long term at his former club PSG where he spent one season in 1996/97.
The French club's wealthy owners set about spending more than 200 million euros on players, with Argentina midfielder Javier Pastore, Sweden striker Zlatan Ibrahimovic and Brazil defender Thiago Silva arriving during Leonardo's tenure.
They also signed former England captain David Beckham on a short-term deal in January, adding glamour on and off the pitch.
Last season the club won their first league title since 1994 and reached the Champions League quarter-finals where they took Barcelona to the brink of defeat before going out on away goals.
Leonardo famously asked his Sky Italia presenter partner Anna Billo to marry him live on air during an interview with her after PSG had been drawn to play Barca.
DISCIPLINARY PROBLEMS
However, despite his success in helping the club to win silverware, the 43-year-old was beset by disciplinary problems.
He is serving a 13-month suspension for pushing a match official after his initial nine-month ban was extended by the French football federation (FFF) when the club failed in their bid to have the original sanction reduced.
Leonardo was banned after television footage showed him bumping into referee Alexandre Castro with his left shoulder in the tunnel after PSG drew 1-1 at home to Valenciennes in Ligue 1 in May.
The sanction meant Leonardo was banned from the bench, the referees' dressing-room and from all official functions.
PSG, who got a suspended three-point deduction, had appealed against the initial nine-month ban imposed by the French League.
"Paris Saint-Germain... regret the harshness of the sanction against Leonardo who still has the full confidence of the club," the French champions said in a statement on Friday.
PSG had been considering whether to appeal against the suspension to the national sporting and Olympic committee (CNOSF), the highest sports authority in France.
Leonardo also received a two-match suspended ban in November from the French federation's Ethics Committee for criticising the referee after Mamadou Sakho was sent off at Montpellier.
With PSG coach Carlo Ancelotti having joined Real Madrid and been replaced by former France manager Laurent Blanc last month, the club now find themselves with a sporting director vacancy to fill for next season as they bid to retain their league title.
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