Coach Bill Lynch announced Lewis' dismissal. Lewis practiced with the Hoosiers throughout the spring and participated in the spring game April 18.
"We are disappointed to have to make this decision," Lynch said in a prepared statement. "When you have expectations of those on your team that are not met, you need to do what is ultimately in the overall best interest of your program."
Indiana's first-year athletic director Fred Glass supported Lynch's decision.
"Today's action underscores that no individual student-athlete, regardless of talent or popularity, is above the expectations of Indiana University," Glass said in a statement.
Lewis started three seasons at quarterback, earning second-team All-Big Ten honors in 2007, when he guided Indiana to its first bowl appearance since 1993. The Jacksonville, Fla., native was suspended for spring practice last year for violating team rules but got reinstated before the summer.
He owns the Indiana record for touchdown passes (48), ranks third in career passing yards (6,395) and second in total yards (8,072). Lewis and former Big Ten MVP Antwaan Randle El are the only Indiana players to record 40 passing touchdowns, 6,250 passing yards, 8,000 total yards, 525 completions and 975 attempts in their careers.
After splitting snaps at quarterback with Ben Chappell last season, Lewis made the move to wide receiver for spring ball.
"It's a win-win right now," Lewis told ESPN.com in March. "And we'll see in the fall. I'm hoping that this might be one of the best decisions we ever made.
"If things are working out, maybe I can get a whole little section in the playbook."
A team spokesman said Lynch and the team would have no further comment on Lewis' situation.
Lewis would be a senior in the fall so if he wants to transfer, he would have to go to a Football Championship Series program.
Adam Rittenberg covers Big Ten football for ESPN.com. He can be reached at firstname.lastname@example.org.