The defeat leaves the Hammers in 17th place on the log, just a point above the relegation zone.
West Ham have lost 10 of their 19 league games this season, and boast just one win in their last five.
Pellegrini, who counts Real Madrid among his former clubs, was appointed by West Ham in the summer of 2018 and guided the club to 10th place in his first season in charge.
"It is with great disappointment that we've had to make this decision," West Ham co-owner 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."
The 68-year-old Chilean joins the likes of Javi Gracia, Quique Sanchez Flores, Unai Emery, Marco Silva and Mauricio Pochettino in losing their jobs this season.
West Ham have been linked with re-appointing David Moyes, who led the club to Premier League safety between November 2017 and May 2018.
