The decision follows an investigation into organised fights, drinking, and drug use at the jail, and allegations about the death of an inmate under Serco's watch.
The investigation by Corrections' chief inspector has been completed, but its release has been held up because of a High Court challenge by Serco.
The report is understood to be highly critical of the company's management at Mt Eden Corrections Facility (MECF). It would not be released until the court battle was completed, which was likely to be next year.
But Corrections has already decided that the company cannot continue to run the prison.
The $300 million deal Serco signed with the Crown in 2010 included an option to review or end the contract after six years, and this option had been recommended by Mr Smith.
The dumping of Serco comes as Sam Lotu-Iiga steps down as Corrections Minister, partly as a result of his handling of the Serco issue.
Incoming minister Judith Collins played no part in the decision.
In July, video footage emerged of inmates at Mt Eden taking part in "fight clubs" and using illicit drugs in their cells. Allegations were also made in Parliament about the mistreatment of inmates.
As reports of violence at the jail continued to surface, Corrections "stepped in" and took over its day-to-day operations.
The final straw for Corrections was when a prisoner who had transferred from Mt Eden to another prison in July arrived with injuries and made "serious allegations" about his treatment at the Serco-run jail. That case had echoes of Nick Evans, who was transferred from Mt Eden to Ngawha Prison with injuries earlier this year and later died at Whangarei Hospital. NZME