Press Secretary Sarah Huckabee Sanders confirmed that Friday was his last day.
His exit follows a review of his position by White House Chief of Staff John Kelly.
Mr Bannon, who helped shape Mr Trump's "America First" campaign message, is returning as head of Breitbart.com, and says he will remain loyal.
The 63-year-old is executive chairman of the website, which has been accused of voicing anti-Semitic and white supremacist views.
In another departure from Mr Trump's team, billionaire investor Carl Icahn announced he was ending his role as the president's special advisor on regulatory reform, after facing criticism that his advice could benefit his own businesses.
Mr Bannon is known to have competed for influence in the West Wing against more moderate factions, including members of the Trump family.
He told the Bloomberg TV network: "I'm leaving the White House and going to war for Trump against his opponents - on Capitol Hill, in the media, and in corporate America."