Bulgaria have taken just five points from seven games and most recently suffered resounding defeats against England and Switzerland.
The nature of those defeats, and growing disenchantment in the squad, led to Monday's decision.
Bulgarian Football Union president Borislav Mihailov said: "There were many reasons to release Matthaus, not only the poor results in the last matches.
"Pressure and negativity had also piled up in the squad, so the change was necessary.
"He lived outside Bulgaria for most of the time and perhaps it also influenced the results and preparation of the national team."
Matthaus replaced Stanimir Stoilov after Bulgaria had lost their first two Euro 2012 qualifiers but was unable to transform their fortunes.
Under-21 coach Mihail Madanski has been named interim coach and will lead the team in the Euro 2012 qualifier against Wales next month.
Matthaus, who enjoyed a glittering playing career with Borussia Monchengladbach, Bayern Munich and Inter Milan, has failed to cut it so far as a coach.
The 50-year-old struggled in charge of Hungary in 2004/05 and has held numerous club jobs including Partizan Belgrade, Rapid Vienna, Salzburg and Atletico Paranaense.