The decision to remove Valverde was confirmed following a board meeting that lasted more than four hours at Camp Nou on Monday afternoon.
Barça are top of La Liga but have won only one of their last five matches. Valverde is the first coach the club has sacked mid-season since Louis van Gaal in 2003.
"FC Barcelona and Ernesto Valverde have reached an agreement to terminate the contract that united both parties," read a club statement.
"Barcelona and Quique Setien have reached an agreement for the latter to become first team coach until 30 June 2022," the club said.