Saunders had been at the club since 2011. He led the Stones to three promotions in his time in charge.
Last week he outlined the struggle the club endured last season. Double defeat over the Bank Holiday weekend proved to be the tipping point.
The club lost 2-1 at home to Boreham Wood on Monday following Saturday’s 3-2 loss at winless Maidenhead.
“This is a day none of us wanted to come but collectively we’ve decided to go our separate ways,” said chief exec Bill Williams.
“In 60 years of football, this is one of the toughest decisions I’ve been involved with. I count Jay as a friend and have the utmost respect for what he’s achieved here at the football club.
“Jay has become synonymous with Maidstone United over recent years and his place in our club’s history is assured. His influence went beyond the first team to the academy, player development centres and soccer schools.
“He will always have a special place at the club, we thank him for everything he’s done and wish him the very best in wherever his football journey takes him next.”