His responsibilities will be assumed by David Simons, chief executive, who last month confirmed plans to sell off the 140 largest Somerfield outlets and 350 Kwik Save stores.
Mr O'Neill, who only assumed the role earlier this year, was employed on a one-year contract and received a salary of pounds 200,000 last year.
Somerfield said Mr Simons was "grabbing the reins" of the Somerfield stores which will form by far the largest part of the group.
Philip Dorgan, retail analyst at WestLB Panmure, said: "It probably makes sense, although they seem to change their management round there every time David Simons washes his socks."
Mr Dorgan questioned the timing of the announcement, saying: "If this is such a good idea why wasn't it announced a month ago? I think it is because he [Mr Simons] has been advised to do it, which makes you wonder who is running the company."
Somerfield is due to report results on 11 January and update the market on the progress of its store sales.
The shares closed 1.5p lower at 86p.Reuse content