Arnold quits after six years in charge of Australia
"After careful consideration I believe it's time for fresh leadership to guide the team forward," said the 61-year-old, who had been in charge since 2018.
Arnold departs after a shock 1-0 home defeat to Bahrain earlier this month then a goalless draw at Indonesia left Australia with one point from their opening two matches in the decisive third round of qualifying for 2026.
In post-match interviews following the draw with Indonesia, the under-pressure Arnold had struggled to hide his frustration after his team squandered a string of opportunities.
Bayern Munich teenager Nestory Irankunda hit the post with Australia's best chance as the Socceroos had 19 shots but failed to score for the second consecutive match.
"I said after our game against Indonesia that I had some decisions to make, and after deep reflection, my gut has told me it's time for change, both for myself and the programme," he said.
"I've given absolutely everything I can to the role and I am immensely proud of what has been achieved during my tenure."
The former Australia international had coached the team since August 2018, taking over from ex-Netherlands boss Bert van Marwijk.
Arnold guided Australia to the last 16 of the 2022 World Cup, where they tested eventual champions Argentina before losing 2-1 after goals by Julian Alvarez and Lionel Messi.
The Socceroos beat Denmark and Tunisia in the group stages for their best-ever showing at a World Cup, but Arnold had his critics with some saying the team lacked style and were too defensive.
Arnold's six-year tenure was his second stint in charge having also been interim boss in 2006-7. Under his stewardship, Australia set a new record in winning 11 consecutive matches to qualify for the last World Cup, a feat unmatched in FIFA history.
Arnold's win ratio of just over 60 percent makes him one of Australia's most successful coaches.
"Graham Arnold's departure marks the end of an era for Australian football," said James Johnson, chief executive of Football Australia.
"Under Graham's leadership we achieved remarkable milestones that elevated Australian football on the global stage."
Australia are now searching for an interim coach ahead of next month's qualifiers at home to China and away to Japan, as they look to reach a sixth consecutive World Cup.
"With critical FIFA World Cup qualifying matches approaching, it's crucial that we identify the right candidate to lead our talented squad now and into the future," Johnson said.