Mr Shannon wanted his 12-month rolling contract to be extended to 24 months.
His place as chairman will be taken in a non-executive capacity by Tom Adam, a non-executive director. The finance and strategy director, Mark Bunce, will become chief executive.
Mr Adam said yesterday that he and the other members of the board regretted Mr Shannon's departure. Mr Shannon was paid pounds 106,000, and will receive the equivalent as compensation for loss of office.
Mr Adam said: 'We tried to persuade him not to leave but he said the refusal to extend his contract amounted to a vote of no confidence. We just felt it would be inappropriate to grant improved benefits at this time.'
On Monday Country Casuals issued a profits warning. It said the cost of establishing Elvi, a brand targeted at larger women, was greater than expected. The shares fell 32p to 120p on the news. Yesterday the stock lost another 4p to close at 112p - an all-time low.
Analysts revised profit estimates for the current financial year down to pounds 2m from pounds 3m.
Mr Adam said there was no connection between the need to publish the profits warning and Mr Shannon's departure.
Mr Shannon led a management buy-in of Country Casuals from Britain's largest textiles concern, Coats Viyella, in 1989.
He still owns about 20 per cent of the company but Mr Adam said he had given no indication of whether he was likely to dispose of the stake.
In January 1992 Country Casual shares were placed with institutions at 130p. The high of 181p was reached in January this year.
In April 1993 the company paid pounds 10.8m for House of Lerose, a clothes maker. It also owns the Koto brand.