From New York magazine: "Jon Favreau Will Not Direct Iron Man 3"
According to this, Favreau wanted Iron Man 3 to actually be about Iron Man, rather than being an Avengers prequel ... also, Marvel got hinky about his salary.
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I hope he's still willing to appear as "Happy" Hogan in the movie.
As opposed to "Unhappy Over Creative Control and Salary Dispute But Contractually Obligated to Appear" Hogan.
I don't know that he is contractually obligated. Heck, they replaced Rhodey and that's a much bigger role than "Happy."
Maybe they could talk Terrance Howard into being "Happy."
Or perhaps Shemp Howard.
Doctor Hmmm? said:
I loved every scene in the first two Iron Mans where Tony was being Tony, and I attribute that to Downey's acting skill and Favreau's talent as a director in those sorts of scenes. ... But Favreau's action sequences blew chunks. They always lacked a sense of danger and were largely unimaginative*. I hope that whoever comes on next can enhance the action scenes while keeping Favreau's sense of fun with Tony.
Additionally, I'll say that Favreau was a perfect director to roll out the franchise to keep it from being just another superhero movie. He brought it to a new level during the non-action scenes, but at the same time his action scenes were terribly pedestrian. His non-action scenes are so good that it's easy to ignore the flaws of the remaining parts of the films.
* Most of his action scenes did have a nice "wow" factor to them, but were you ever even remotely worried about the good guy? No, not really.