Media reports have suggested Lowe could become team principal at Williams but team sources told Reuters that was not on the cards.
Lowe's departure leaves another major hole in Mercedes' 2017 line-up as it stands, with the team yet to announce who will drive alongside Lewis Hamilton this season following world champion Nico Rosberg's surprise retirement announcement at the end of a year ago.
Lowe, who in recent months had been widely rumoured to be contemplating an offer from the Williams team, played a key role in Mercedes' three consecutive double F1 world championships.
Executive director and co-owner Toto Wolff added: "Paddy has played an important part in our success during the past three-and-a-half years and we thank him for his contribution to this significant chapter in Mercedes' motorsport history".
The Mercedes AMG Formula One team on Tuesday confirmed that its Technical Director Paddy Lowe has stepped down.
"I am now looking forward to a new challenge and wish everyone well at Mercedes".
One of the architects behind Mercedes' recent success in Formula One is leaving the team after 3 1/2 years.
Mercedes has outlined an interim period technical reshuffle which will see Aldo Costa as Engineering Director, Mark Ellis as Performance Director, Rob Thomas as Chief Operating Officer and Geoff Willis as Technology Director.
Lowe joined Mercedes in 2013 and has helped oversee two world driver's titles for Hamilton and one for Rosberg.
And the announcement of Lowe's departure is also said to be a sign that Mercedes are almost ready to announce their replacement for Nico Rosberg.
A possible replacement could be former Ferrari technical director James Allison, who left the Scuderia last July and is himself on gardening leave.