He departed after witnessing United's first home game of the season end in humiliation as Neil Warnock's Queens Park Rangers inflicted a 3-0 defeat.
The club released a statement saying Blackwell had left by "mutual consent".
A club statement said: "Kevin Blackwell has worked tremendously hard over the last two and a half years and his record in terms of results is equal to, if not better, than most previous managers at Bramall Lane.
"He will always have a warm welcome at Sheffield United. However, it is time for us to move on because our ambition remains the same in challenging for promotion, hence this decision to look for a new manager to carry on the work Kevin has been doing."
Blackwell left Bramall Lane without commenting.
Goals from Hogan Ephraim, Jamie Mackie and a penalty from Adel Taarabt had put the game out of reach for the Blades after just 23 minutes.
Home supporters started the afternoon abusing former goalkeeper Paddy Kenny, making his first return since to the club joining Rangers in a controversial move this summer.
By the final whistle, however, their anger was being directed towards manager Kevin Blackwell.
Kenny was rarely called upon to make a save such was Rangers' overall superiority.
Ephraim opened the scoring on 11 minutes after running onto a pass from Taarabt.
Mackie doubled the lead in the 20th minute with a far post header from Ephraim's cross.
Taaraby scored from the penalty spot three minutes later after Blades goalkeeper Steve Simonsen tripped striker Heider Helguson.
The season started well for the Blades with a point away to Cardiff City, despite playing an hour of the game with just 10 men.
But a midweek defeat at Hartlepool United in the Carling Cup, coupled with the first-half humiliation on Saturday - ironically against Neil Warnock, for so long Blackwell's mentor - was the final straw for the Lane board.
Welcome to the Yorkshire Post's exciting match-day service, called Match Centre. Here you will find minute-by-minute updates, stats and team formations. Plus reports from every game in England, from the Premier League down to the Blue Square Premier.
Simply select your game from the pull down menu, then click on the 'i' information button on the right of the fixture and it will give you access to everything you need to know about your team.
So if you can't make it to a game, head for the Match Centre and we will give you the best seat in the house. Click the link below.
For the latest team news, score and commentary from your team check out our new Match Centre