The 42-year-old departs after overseeing 39 matches, despite leading the Bergamo side to a seventh-place finish last season following a difficult start to the campaign.
Palladino was appointed in November to replace Ivan Juric, taking over a team languishing in the lower half of the table.
While he steadied results, Atalanta failed to match the levels achieved under former manager Gian Piero Gasperini.
Their Champions League run ended in the round of 16, where they suffered a heavy 10-2 aggregate defeat by Bayern Munich.
Italian media have reported that former Lazio, Juventus and Chelsea boss Maurizio Sarri is the leading candidate to replace Palladino. The 67-year-old recently ended his contract with Lazio by mutual agreement.