Freuds has worked with Asda on the corporate and consumer for just under a decade, beginning in April 2007.
The news comes after the Walmart-owned retailer brought in a new vice president of corporate affairs, Charlotte Cool, who was previously the director of comms for the John Lewis Partnership.
Asda has also recently moved its ad account to Saatchi & Saatchi, and last month welcomed new CEO Sean Clarke, weeks ahead of announcing declining sales, although pre-tax profits increased thanks to wage bill savings and procurement efficiencies, as reported by PRWeek sister title Campaign.
A spokeswoman for the retailer said: "Following a successful partnership across our consumer and corporate accounts, we have decided to serve notice on our existing contract with Freuds."
She said that Cool would oversee the functions of media relations, public affairs, sustainability, community and the Asda Foundation, which meant that "the time is now right to look at our mix of in-house and agency support".
"We are looking to create a strategic business unit that is led by a strong in-house team and supported by an integrated roster of specialist agencies – a move that is in line with much of the retail market," the spokeswoman went on to say.
A statement from Freuds said: "We have enjoyed a longstanding partnership with Asda over a decade that has seen seismic changes in the retail sector. We fully understand the changes they are making to face the challenges ahead."
Freuds' proactive work with the supermarket included high-profile product development, such as its George fashion label launching "mid-sized jeans" for women in sizes 11, 13 and 15, and creating and launching its Asda Mumdex.
Asda also works with Morrow Communications in Northern Ireland, Havas PR on regional comms, Lee Publicity on its George clothing line, and does employer branding work with Edelman. These relationships are unaffected.
PRWeek understands Freuds will not be making redundancies as a result of the loss.
Freuds is the UK's eighth largest PR firm and the 42nd globally, with 223 staff and UK income of £28.9m last year, according to PRWeek's Global Agency Business Report.