Holloway and Palace co-chairman Steve Parish announced the split by mutual consent, just two days after the team lost 4-1 at home to Fulham.
The former Blackpool boss said he did not have the energy for the relegation fight, claiming the club had lost the spirit which helped them win promotion last season, because of their raft of summer signings.
Defeat to Fulham left them second bottom of the Premier League with seven losses from eight games.
Holloway said: “This club needs an impetus of energy. But I just feel tired to be honest. I’m worn out.
“I want to give them the chance to stay in this division. They didn’t want me to do this. They’ve got a great chance, they’ve got 30 more games. The best chance they’ve got is if they use some of the money this big division gives them to get someone they couldn’t afford when they chose me, and if that happens, sitting at home in my front room, no one is going to jump higher than me.”
Holloway only took over at Selhurst Park last November and led them to promotion via the play-offs. But this season only Sunderland’s woeful form has kept them off the foot of the table and the thrashing at home by fellow strugglers Fulham was the final straw.
Palace signed enough players for an entire new team in the summer, bringing in the likes of the Marouane Chamakh from Arsenal, Reading pair Adrian Mariappa and Jimmy Kebe, Jerome Thomas from West Brom, Jose Campana from Sevilla, Stephen Dobbie from Brighton, Dwight Gayle from Peterborough, Elliot Grandin from Blackpool and, on loan, Southampton’s Jason Puncheon and Stoke’s Cameron Jerome.
Holloway said: “I didn’t value enough the spirit of the group that helped us get to the Premier League
“I’ve lost the spirit of that group. I owe it to the lads to admit that.
“I’m not saying my new signings aren’t good enough. But they need to buy into this football club the same way my other lads did.”
Parish emphasised that he never had any intention of sacking Holloway, saying: “He leaves our club with his head held very high.” Keith Millen takes temporary charge for the match against Arsenal on Saturday.
Tony Pulis is the early favourite to replace Holloway, while other contenders include Neil Warnock, Martin O’Neill, Roberto Di Matteo and Gianfranco Zola. On Pulis, Parish said “He’s never been relegated, and he’s out of work. We’ll look.”