Yamaha, who extended Rossi’s deal to 2018 in March, said in a statement they would announce a replacement for Lorenzo in due course.
Suzuki’s Spaniard Maverick Vinales is seen as a frontrunner.
Ducati confirmed separately that the 28-year-old reigning champion was joining the Italian manufacturer on a two-year deal.
There are 15 races remaining this year, with a home race for Lorenzo next up this weekend in Jerez.
Lorenzo has won all of his titles with Yamaha, joining the Japanese manufacturer in 2008. He has racked up 41 race victories and been on the podium 99 times in 141 starts.
His relationship with nine times champion Rossi has generated plenty of headlines over the years, with the 37-year-old Italian recognising the challenge from the moment the younger Spaniard walked through the door.
At one point, Yamaha had to erect a wall to divide the garage and the two riders barely spoke to each other.
The animosity mellowed into mutual respect but that was sorely tested last year when they were battling each other for the title.
The season culminated in Rossi accusing Honda rival and double champion Marc Marquez of helping Lorenzo win the title in a “Spanish stitch-up” at the deciding race in Valencia.
Rossi and Marquez had clashed in the previous round in Malaysia, with the Italian forcing the Spaniard wide and flicking out a knee that sent Marquez into the gravel.
Then ensuing controversy caused huge ructions in Spain and Italy, with Lorenzo initially siding with Marquez in a move that put him at odds with others in the team.
“Not only me, but a lot of people will lose respect for him as a sportsman,” Lorenzo said then. “He’s one of the greatest riders in history but I think a lot of people will change their opinions.”
Ducati won the championship with Casey Stoner in 2007 but have not won a race since the Australian left in 2010.
Rossi had two seasons there in 2011 and 2012 with just three podium finishes.
Italy’s Gazzetta dello Sport website said Lorenzo would be the highest paid rider on the grid, set to earn 25 million euros ($28.28 million) over the two years.
(Reporting by Alan Baldwin; Editing by Alison Williams)