The 41-year-old returned to his boyhood club, whom he helped win the Uruguayan top flight during the twilight of his playing career in the 2015/2016 season, last December but his reign lasted just eight months.
Forlan won just four of his 11 games in charge of Penarol, with the 50-time Uruguay champions languishing in 7th position on the league table.
"I have to leave Penarol but first I wanted to write a few words of gratitude," Forlan wrote on Twitter.
"Thank you for the opportunity you gave me, it was a pride for me to lead Club Atletico Penarol. To the players, thank you very much for your patience, your respect, your dedication and your teachings.
"To all those who work day by day and in silence at Los Aromos, from my heart, thank you. Finally, thanks to the fans for the love.
"I have no reproaches, that's how football is.
"Successes in whatever comes, up Penarol!"
After failing to find his feet in England with Manchester United, whom he joined from Indepediente in 2002, Forlan revived his career in Spain with Villarreal, where he won the European golden boot in the 2004/2005 season.
Forlan transferred to Atletico Madrid in the summer of 2007 as a replacement for Liverpool-bound Fernando Torres, helping the Rojiblancos to the Europa League title in 2010.
Forlan played 112 times for the Uruguay national team, scoring 36 goals and was named as the best player at the 2010 FIFA World Cup in South Africa.
