Former England wicketkeeper Downton, 58, took over the role in February, 2014 following the team's 5-0 defeat in the Ashes series in Australia.
Downton oversaw the decision to sack controversial batsman Kevin Pietersen and his departure will lead to increased speculation that the gifted right-hander could be recalled to the England side.
He also made the decision to fire Alastair Cook as one-day captain in December and the team endured a dismal World Cup in Australia and New Zealand this year, failing to get through the group stage.
"The England Cricket Department needs to deliver performance at the highest level and our structure needs to be accountable for reaching the standards we aspire to," ECB chief executive Tom Harrison said in a statement.
A new leadership position focussed on performance will be created.
"The new role we are putting in place will deliver an environment where world-class performance is at the heart of everything we do," Harrison said before paying tribute to Downton's achievements.
"Paul is a man of great integrity who has worked extremely hard to make a difference at the ECB," Harrison added.
"He joined at a very difficult time, but under his leadership the test team have made significant strides. We thank him for his hard work, drive and determination and wish him every success for the future."
Downton also appointed Peter Moores as England coach and he is under pressure following the poor World Cup as the team prepare for the first of three tests against West Indies starting in Antigua on Monday before home series against New Zealand and Australia.
(Reporting by Ed Osmond, editing by Toby Davis)
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