The club revealed only late last month that they planned to hold contract talks with the Scot in the new year.
However, Saturday's 1-0 defeat at Cardiff was the Baggies' fourth in a row leaving them 16th in the league.
The club announced their decision to dispense with Clarke, and place him on gardening leave, was the unanimous decision of the board of directors with the Baggies just two points and two places above the relegation zone.
Assistant Kevin Keen has also been placed on gardening leave.
The club have won only seven of their 34 Premier League games during the calendar year - a 20 per cent win percentage yielding a total of only 31 points.
Joint-assistant head coach Keith Downing will assume control of first-team affairs while the club search for Clarke's successor.
Sporting and technical director Richard Garlick told the club's official website: "We have reluctantly come to the decision to relieve Steve of his duties after very careful consideration.
"It has been well documented that we have not had the rub of the green in certain games this season but that does not cloud the generally disappointing points return during this calendar year, culminating in today's fourth-successive defeat at Cardiff.
"This club's track record proves we do not take such decisions lightly, having only enforced a change in this position three times in approximately 14 years.
"But with key games coming thick and fast, we felt it was important we acted now to give the club the best possible chance of a successful outcome this season.
"Our player wage bill is the highest in the club's history and we feel we have built a squad capable of being very competitive in the Premier League.
"We now begin the search to find a new head coach who will work within our existing structure, which has been in place for the past six years."
He added: "On behalf of the board, I would like to thank Steve and Kevin for their efforts over the past 18 months.
"We wish them and their families well for the future."
Clarke, who took over at The Hawthorns in June 2012, was out of the contract at the end of the season.
The 50-year-old replaced Roy Hodgson, after he had been appointed England manager, at the Black Country club in what was his first managerial role having previously been assistant manager at Chelsea, West Ham and Liverpool.
While the Baggies are currently struggling, Clarke had guided them to eighth last season.