The reasons are unclear and we imagine no one will ever quite know for sure but it seems to be a combination of Marvel thriftiness and Favreau's growing frustration at having his films turned into giant Easter egg-fests that has finally caused a rift between the director and the studio. Favreau has been playing cagey about returning for a while now taking a wait-and-see approach when asked earlier in the year. As for Marvel, its reported their notoriously cheap approach to making big-budget action movies wasn't going to gel with having to pay Jon Favreau north of $10 million upfront for "Iron Man 3" in addition to 15% backend on the final gross. Word is, Marvel also put forward a ridiculously packed and complex vision for the third film that finally pushed Favreau over the edge, forcing him to leave the franchise.
However, Marvel isn't out of the woods just yet. Robert Downey Jr. has director approval in his contract so if they think they can just throw in a newbie helmer who will work for peanuts they might have another think coming. And moreover, this could all just be one big tactic by Favreau as well; as you might recall, he used fan outrage at the lowballing of his salary for "Iron Man 2" to score a better paycheck. Geeks are notoriously loyal and they may not take too kindly to someone else stepping into the Favreau/RDJ relationship that has, thus far, done so well. So will the geeks rally to get Favreau back and let him tell the story his way without all the needless cameos and eyewinks? We'll have to wait and see.
"Iron Man 3" is already scheduled for a May 3, 2013 release, so Marvel does still have some time to sort this all out. Deadline says they have this confirmed.