A 2-1 home defeat to fellow strugglers Aston Villa on Saturday was the club's fourth league loss in a row and cast them four points from safety.
McDermott, who took as caretaker manager in 2009 before succeeding Brendan Rodgers full-time a year later, guided the club to the Premier League last season.
A statement from the club on Monday afternoon read: "Owner Anton Zingarevich wishes to place on record his thanks to Brian.
"However, in our current situation, Anton Zingarevich felt that a change was necessary.
"The search for a successor will start immediately. It is hoped a new manager will be in place as soon as possible."
Sky Bet swiftly installed former Swindon boss Paolo Di Canio as odds-on favourite to take over at the Madejski Stadium, while ex-Southampton manager Nigel Adkins has emerged as another early contender.
Reading later announced that academy chief Eamonn Dolan would take charge of first-team matters ahead of a daunting trip to Manchester United on Saturday.
The Royals also confirmed that first-team coach Nigel Gibbs had left the club he joined in 2006.
Reading players have come out in support of former McDermott with striker Jason Roberts telling Sky Sports News: "He's a football man and a good man and I just think at this moment in time we take stock of what he has achieved and place on record our thanks.
"I as an individual player and I'm sure the others would like to place on record their thanks for what he and his (backroom) team have achieved for us."
Fellow forward Noel Hunt took to Twitter to praise the out-going boss, saying: "Want to say thanks to Brian for everything he did for me especially. He's been a Great Manager, Man and Friend to me and will be missed!"
With away games at Old Trafford and Arsenal the next two fixtures for Reading it remains to be seen if a replacement will be appointed before the trip to the leaders on Saturday evening.