Dercon's appointment had been controversial from the start, with critics fearing he would sell out the theatre's radical and provocative roots.
Protests reached their peak a month after he took the reins, when hundreds of demonstrators occupied the Volksbühne in September 2017 for several days before police moved in to clear the space.
In a statement issued by Berlin state authorities, head of cultural affairs Klaus Lederer said he and Dercon had come to an agreement for the artistic director to step down with immediate effect.
“Both parties agreed that Chris Dercon's concept did not work out as hoped, and the Volksbühne needs a new start,” the statement said.
Lederer also stressed that “personal attacks and insults by part of the city against Chris Dercon in the past are unacceptable. Such forms of confrontations are undignified and uncultured.”
Rebuilt after World War II in an imposing Stalinist style using remnants of Hitler's destroyed chancellery, the Volksbühne prides itself on caustic commentary on political and capitalist hypocrisy.
Its previous artistic director, Frank Castorf, led the avant-garde theatre for almost a quarter of a century and was credited with turning it into one of Europe's leading venues with his bold, controversial and often lengthy productions.
Belgium-born Dercon quickly ran into stubborn opposition as he was the first non-artist to lead the theatre.
His appointment, which was announced in 2015 by Berlin authorities that finance the theatre, also became viewed by critics as a sign of the capital's rapid gentrification drawing investors seeking to capitalise on the city's cultural scene.