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".
West Ham host Bournemouth, who sit one point and one place above them in the table, on January 1.