The 48-year-old yesterday left Valley Parade following talks with the Bantams’ hierarchy.
City had offered Grayson a two-year contract in the hope he would stay and pilot the club’s push for a return to the Championship for the first time since 2004.
Speculation in recent days had suggested Scunthorpe United and Barnsley were both keen on installing the former Leeds United chief this summer.
The Reds are without a head coach following Sunday’s dismissal of Jose Morais while Nick Daws has been in interim charge at Glanford Park since Gary Alexander’s dismissal.
But sources have insisted to this newspaper that neither Grayson, who rejected offers from Oxford United and Milton Keynes Dons to succeed Stuart McCall on a short-term deal in February, or his representatives have had contact with any club.
Instead the decision to leave was based solely on his own reservations about whether City are capable of launching a sustained push for promotion.
With next season’s playing budget set to be similar to this term – something former manager McCall described as being mid-table – Grayson felt the required overhaul of a squad that finished well adrift of the play-offs would be impractical.
It is also believed he had concerns over the infrastructure that surrounds the first team, including the lack of an analyst and the club renting their training facilities from a school.
Grayson’s next move will be key for a managerial career that until this season had been geared towards longer-term projects.
His stint in management started with three years at Blackpool, which were followed by another three years at Leeds.
Grayson also spent a little over four years at Preston North End before heading to Sunderland last summer.
Long-time assistant Glynn Snodin also left Valley Parade yesterday, though the pair will be attending Friday’s memorial service for the 56 victims of the 1985 fire disaster.
Yesterday’s parting of the ways is understood to have been amicable, Grayson having enjoyed a good working relationship with joint chairman Edin Rahic.
Both Rahic and co-owner Stefan Rupp are now focused on the search for a new manager.
It is a big test for the duo, who bought City from Julian Rhodes and Mark Lawn a little under two years ago. Last season Bradford reached the League One play-off final only to lose to Millwall at Wembley.
A club statement read: “Simon joined the Bantams in February 2018 and has conducted himself impeccably throughout his tenure.
“However, the short-term deal agreed between Simon and the club was always subject to further discussions, scheduled to take place upon the conclusion of the 2017-18 season.
“Given the clarity surrounding Simon’s agreement from the outset, the club remains in a strong position to proceed with recruitment this summer.”
Grayson’s departure came after he had devised City’s pre-season schedule. The club’s retained list is expected to be announced over the weekend or early next week.