A run of just two wins in 14 games, including seven defeats in their last nine league matches, saw patience run out with the 66-year-old former Real Madrid and Manchester City boss.
"It is with great disappointment that we've had to make this decision," West Ham joint-chairman David Sullivan said in a club statement.
"Manuel is a gentleman and it has been a real pleasure to work with someone of his calibre.
"However, it has become clear that a change is required to get the club back on track in line with our ambitions this season. We felt it was necessary to act now in order to give the new manager as much time as possible to try and achieve that goal.
"It has become clear that a change is required to get the club back on track in line with our ambitions this season."
West Ham overcame a difficult start to finish 10th in Pellegrini's first season in charge.
However, the Chilean has failed to provide enough of a return on a significant transfer spend over the past 18 months with over £100 million splashed on Felipe Anderson, Sebastien Haller, Pablo Fornals, Andriy Yarmolenko and Issa Diop.
The early contenders to replace Pellegrini include former Hammers boss David Moyes and former Brighton manager Chris Hughton.