The news comes after three days of mounting speculation over the Italian's future at the Etihad Stadium, and on the anniversary of last season's dramatic title success.
A club statement confirmed the 48-year-old had been relieved of his duties after failing to achieve this season's "stated targets".
Assistant manager Brian Kidd is to take over as interim boss for the two remaining matches of the season, against Reading and Norwich, and next week's tour of the United States.
Malaga coach Manuel Pellegrini is the favourite to take over full-time, having been linked heavily with the post since the latest rumours of Mancini's demise surfaced on Friday night.
City's statement read: "It is with regret that Manchester City Football Club announces that Roberto Mancini has been relieved of his duties as Manchester City manager.
"This has been a difficult decision for the owner, chairman and board to make and it is the outcome of a planned end-of-season review process that has been brought forward in light of recent speculation and out of respect for Roberto and his extensive contributions to the football club.
"Despite everyone's best efforts, the club has failed to achieve any of its stated targets this year, with the exception of qualification for next season's UEFA Champions League.
"This, combined with an identified need to develop a holistic approach to all aspects of football at the club, has meant that the decision has been taken to find a new manager for the 2013-14 season and beyond."
Mancini's position looked impregnable when he was rewarded for winning the title with a five-year contract last summer.
But City's failure to build on that achievement has cost him, with their title defence being an underwhelming one and their Champions League campaign ending prematurely at the group stage.
They failed to secure the consolation of a second FA Cup win in three seasons as Wigan shocked them in Saturday's final, although it seems Mancini's fate had already been decided before then.
Rumours on the eve and the morning of the match suggested Mancini's exit was imminent and overshadowed the build-up to the game.Mancini later blamed club officials for failing to quash the rumours but no denials were forthcoming.
Chairman Khaldoon Al Mubarak said: "Roberto's record speaks for itself and he has the respect and gratitude of Sheikh Mansour, myself and the board for all of his hard work and commitment over the last three and a half years.
"He has clearly also secured the love and respect of our fans.
He has done as he promised and delivered silverware and success, breaking the club's 35-year trophy drought and securing the title in 2012.
"I would like to personally and publicly thank him for his dedication to the progress that he has overseen and for his support and continued friendship."
Mancini, who replaced Mark Hughes in December 2009, certainly leaves with a record which bears scrutiny and with the affection of supporters.
There have also been mitigating factors to this season's disappointments - notably injuries, a failure to land prime transfer targets and a notable decline in form of several of last year's stars.
To most clubs, results would still seem no cause for shame, but there have also been suggestions that Mancini's man-management style caused further issues.
Mancini can be a brusque and distant figure at times and what have seemed awkward comments about players such as Joe Hart, Micah Richards, Samir Nasri and even Vincent Kompany have seemed unnecessary.
That contrasted with the indulgence he seemed to show Mario Balotelli, whose many controversies distracted the club from their objectives for too long before his sale in January.
Attention will now turn to Pellegrini, who said over the weekend he will leave Malaga at the end of the season.
The Chilean's agent met with City director of football Txiki Begiristain last month and the former Real Madrid and Villarreal coach has been linked with Eastlands frequently in recent months.
Despite that, he has denied an agreement is already in place.
Speaking on Sunday, he said: "I deny here and now being the new coach of Manchester City, I haven't signed any agreement with anybody.
"I've been fortunate enough, and very proud, that every year the big clubs have shown an interest in me.
"I have an agreement with Malaga not to talk to anyone and nothing has been agreed with any other club.
"I hope in the coming weeks that things will become a little clearer what is going to be the future here at this club."