The club sit one from bottom in England's top-flight with nine points from 16 games after Saturday's 2-1 home defeat to fellow strugglers Ipswich - Wolves' fourth consecutive loss.
A statement from the club on Sunday said: "Wolves have parted company with head coach Gary O'Neil and his backroom staff."
Chairman Jeff Shi said: "We're very grateful to Gary for all of his effort, dedication and hard work during his time at the club, and we wish him and his team the best of luck for the future."
Emotions spilled over at full-time on Saturday as Rayan Ait-Nouri was shown a second yellow card and Matheus Cunha also had to be restrained.
O'Neil was appointed in August 2023 following the departure of Julen Lopetegui and signed a new four-year deal with the club in August this year.
Wolves finished 14th in his first season at the club, with the Midlands side beating champions Manchester City and winning impressively at Chelsea and Tottenham Hotspur, as well as beating great local rivals West Brom during a journey to the FA Cup quarter-finals.
This season, though, Wolves have only found themselves in a relegation scrap.
Frustrations also boiled over in Monday night's defeat to West Ham when Mario Lemina scuffled with Jarrod Bowen after the full-time whistle, resulting in the Wolves midfielder being stripped of the captaincy.
Wanderers were then beaten by Jack Taylor's stoppage-time header on Saturday having taken an early lead through Matt Doherty's own goal and following the full-time scuffles, O'Neil said his players needed to "take some responsibility".
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