Lillee was quoted as saying he was upset by the organisation's plan to reduce his involvement and financial terms after a 15-year coaching and mentoring association with the country's most promising pace bowlers.
Lillee, who was Australia's leading Test wicket-taker with 355 wickets before he was overtaken by current-day Test stars Shane Warne and Glenn McGrath, rejected Cricket Australia's terms, raising fears that his skills and experience will be lost to the new generation of fast bowling talent.
"A proposal was put to me by the cricket academy to cut my days down from 30 to 15 per year," Lillee was quoted in press reports.
"They also didn't want me to do the (Australian) states, so I would have no contact with the ones who really need the help, the under-17s and under-19s.
"They wanted me to focus on the (Adelaide-based) academy and the Test players and wanted to cut (my work) down to about half the days and for me to take a discount on my daily rate.
"I wrote to them and said I was not at all happy. But life moves on and I have got plenty to do.
"I'm disappointed from the point of view that I felt the work I was doing there was bearing fruit. I loved what I did there."
Lillee's departure comes at a time when Australian cricket is working towards developing the next generation of fast bowlers to replace McGrath, 34, Michael Kasprowicz, 32, Jason Gillespie, 29, and Brett Lee, 28.
Academy chief executive Trevor Robertson said while Lillee's decision was disappointing he had not shut the door on future negotiations with the Test great, who is also the new president of the West Australian Cricket Association.
"We hope we don't lose such an important resource. It has been an exhaustive process and we have left discussions open," Robertson said.
"The offer was not what Dennis wanted but it was still a good one made within our budget.
"We wanted to change Dennis' role but we could not come to a commercial arrangement and he wasn't able to accept our offer," said Robertson.
Lillee's duties are now expected to be taken by former Test swing bowler Damien Fleming, who shared the coaching work with Lillee last southern summer and is regarded as one of Australia's most promising coaches.