The former Republic of Ireland boss has been in charge at Portman Road for almost six years and had been the longest-serving manager in the second tier, but the 59-year-old will be moving on after holding talks with owner Marcus Evans on Wednesday night.
Assistant manager Terry Connor will also leave the club when his contract ends this summer.
Ipswich have remained in the Sky Bet Championship for the duration of McCarthy's reign and are currently 12th in the standings - 10 points off the play-off places.
Evans told the club website: 'Mick and I had a discussion and we both agreed that this was the best way forward for him and for Ipswich Town.
'It never got to the point where we actually talked about a new contract, it just felt right that it was time for us both to look at different options.
'Mick will see out his contract here and then we will look to make an announcement regarding his successor in due course.
'When Mick arrived, we looked to be on the way to relegation. He saved us from that and then took us to the play-offs within two years.
'In his six years here he has made us a very competitive club in what is a very competitive league. No one looks forward to playing Ipswich.
'In the meantime, I want to put on record my sincere thanks to Mick for the job he has done here as our manager and urge supporters to get behind him and the players so that we can finish the season as strongly as possible.'
McCarthy said: 'I had a good discussion with Marcus and we feel this is the right thing to do for me and for Ipswich Town.
'I have loved my time here and I am proud of what I have achieved over the last six years, and the relationship I have enjoyed with the players and all the staff at the club in that time.
'I won't be leaving with any regrets.
'I have given everything for Ipswich Town and I will see out my contract in the same way.'
Ipswich were bottom of the table when McCarthy took over but he had them in the play-offs by the end of the 2014-15 season.
However, fans have become frustrated by a lack of progress in recent campaigns as Ipswich have continued a lengthy Championship tenure, which has lasted since the 2002/3 campaign.
The club announced earlier this week that a decision would be made on McCarthy's future before the end of April.