The 54-year-old, who led the team to three drivers' and constructors' championship doubles in a row from 2014 to 2016, is expected to join Williams.
He will be replaced by former Ferrari technical director James Allison, whose deal was signed some months ago, sources say, but is not yet confirmed.
Lowe is set to take on a role heading the technical side of the entire Williams group, including the F1 team.
He is also expected to head up the burgeoning Williams Advanced Technologies business.
However, sources say a final agreement between Lowe and Williams has not yet been reached.
Williams are said by insiders to be lining up Toro Rosso technical director James Key to join them in the same role when his contract with Red Bull expires at the end of the year.
"Paddy has played an important part in our success during the past three and a half years and we thank him for his contribution," head of Mercedes-Benz Motorsport Toto Wolff said.
"Success in Formula 1 is not about single individuals but about the strength in depth and technical capability of an organisation. We have the talent in place to continue our success of recent years."
Lowe, who will serve a period of gardening leave before taking up his next role, added: "I have had a fantastically successful and enjoyable three and a half years at Mercedes.
"I am now looking forward to a new challenge and wish everyone well at Mercedes."
Allison, 48, is effectively a like-for-like replacement for Lowe, but he is not expected to be as contractually senior nor earn as much as his predecessor. Lowe's £3m income for the past two seasons - including all bonuses - is said to have caused tension at Mercedes.
Allison will join Mercedes when his own period of gardening leave from Ferrari expires in the summer. He split with the Italian team last July as they underwent a restructure of their technical department.
Lowe's move is not directly linked to the impending switch of Williams driver Valtteri Bottas to Mercedes to replace world champion Nico Rosberg, who retired last year, five days after winning the title.
But sources say now Lowe's position is clear, it may smooth the path to the Bottas deal being completed.
Since BBC Sport revealed Bottas was Wolff's first choice to replace Rosberg, all the elements have been put in place.
Williams revealed in a statement to the BBC that they were prepared to let Bottas go and have lined up his former team-mate Felipe Massa to replace him.
But the financial compensation Mercedes have to pay for Williams to release Bottas has not yet been agreed.
Williams have persuaded Massa to come out of retirement after the 35-year-old announced his decision to leave the sport at the end of last season.
They needed a driver over 25 years of age to replace Bottas because their title sponsor, the drinks giant Martini, cannot use two drivers under that age for its global promotional campaign.
Williams' other driver in 2017 is 18-year-old Canadian rookie Lance Stroll, who is reputedly bringing in the region of £20m to the team in financial backing.
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Paddy Lowe has left his position as technical boss of Mercedes.