An Ulster favourite as a player, Davidson joined the coaching set up prior to the start of the 2009/10 campaign and helped the Belfast side reach the knockout stages of both the Heineken Cup and the Magners League this term.
"I'd like to take this opportunity to thank Jeremy for the contribution he's made over the past two seasons and on behalf of Ulster Rugby wish him well for the future," said Ulster's head of operations, David Humphreys.
Davidson cut his coaching teeth at Dungannon having retired from the playing side of the sport in 2003, two years after his second Lions tour in Australia.
Largely unknown when he headed to South Africa with the 1997 Lions, Davidson won a Test spot alongside captain Martin Johnson and was voted Players' Player of the Tour as Sir Ian McGeechan's men secured a stunning series win over the Springboks.
Previously on the coaching staff at Castres, no comment has yet been made on whether Davidson has lined up a new club or will take a step away from frontline coaching.