Peacock and his number two, former England winger Trevor Sinclair, left the Giant Axe at lunchtime by 'mutual consent' following the First Division North club's 2-0 defeat at Droylsden on Saturday in the FA Cup Second Qualifying Round.
Hunter, 30, signed for the Dolly Blues in June 2013 following a nine year spell at the Shrimps. Hunter, who will be assisted by another senior professional and Morecambe star, striker Danny Carlton, will take charge for the first time on Tuesday night when City host Farsley Celtic in league action.
Former Newcastle United, Blackburn Rovers and Queens Park Rangers defender Peacock, 47, was appointed in April 2013 as the successor to Neil Wainwright and local Non-League stalwart Michael Stringfellow.
Sinclair, who turned out for Blackpool, Queens Park Rangers, West Ham United and Manchester City, was reunited with his former teammate following his appointment as assistant manager at the start of last season.
The Dolly Blues confirmed the duo's departure in a statement on their website. The club said: "Lancaster City Football Club and Darren Peacock have parted company by mutual consent.
"The club would like to express their appreciation for the time and effort Darren has put into the job, which was way beyond normally expected of managers at this level, and he has never been less than thoroughly professional in his approach, despite our modest budget. We wish Darren all the best in his future endeavours."
Potential candidates to succeed Peacock should sent their footballing CVs with a covering letter to Lancaster City secretary Ray Coote at: 1raycoote@gmail.com
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