City failed to back their manager over the weekend as the build-up to Saturday's FA Cup final was overshadowed by reports linking Malaga's Manuel Pellegrini with the job.
City were beaten by Wigan at Wembley, and that disappointment alongside an unconvincing Premier League title defence and a second successive failure to get beyond the Champions League group stage, means Mancini's time in Manchester is up after three-and-a-half years.
The club's owners also spoke of a desire for a more "holistic approach" in a statement which read: "It is with regret that Manchester City Football Club announces that Roberto Mancini has been relieved of his duties as manager.
"This has been a difficult decision for the owner, Chairman and Board to make and it is the outcome of a planned end of season review process that has been brought forward in light of recent speculation and out of respect for Roberto and his extensive contributions to the football club.
"Despite everyone's best efforts, the club has failed to achieve any of its stated targets this year, with the exception of qualification for next season's UEFA Champions League.
"This, combined with an identified need to develop a holistic approach to all aspects of football at the club, has meant that the decision has been taken to find a new manager for the 2013/14 season and beyond."
Chairman Khaldoon Al Mubarak said: "Roberto's record speaks for itself and he has the respect and gratitude of owner Sheikh Mansour, myself and the board for all of his hard work and commitment over the last three-and-a-half years.
"He has clearly also secured the love and respect of our fans. He has done as he promised and delivered silverware and success, breaking the club's 35-year trophy drought and securing the title in 2012.
"I would like to personally and publicly thank him for his dedication to the progress that he has overseen and for his support and continued friendship."
Brian Kidd will be in charge for the final two games of the season and the post-season tour to the United States, but the focus now will be on Pellegrini.
The Chilean, a former Villarreal and Real Madrid boss, is an odds-on favourite for the job but denied on Sunday night that a deal to take over is already in place.
"I deny here and now being the new manager of Manchester City," Pellegrini told a press conference. "I have not signed an agreement with anyone, not with Manchester City, not with Roma, not with Napoli, not with PSG, not with any of the clubs who have been mentioned.
"I've been fortunate enough, and very proud, that every year the big clubs have shown an interest in me.
"I had a date agreed with Malaga not to talk to anyone and I have no agreement with anyone.
"In the next few days I hope to clarify a bit what the future will be here in the club."
Mancini had criticised City for not stopping the speculation after seeing his team stunned by Wigan Athletic in the FA Cup final at Wembley on Saturday.
Speaking after the game, the Italian said: "You (media) continue to speak about this for six months and there has been too much in the last two weeks.
"I don't know why the club hasn't stopped this because it is not correct and I don't think it is true.
"It is rubbish this speculation. I will still be here next season. It is rubbish, but I know football and know that everything can happen.
"But if it is true, we will know in the next two weeks. If it isn't, this is stupid (speculation).
"If it is true, then I am stupid for not believing this. Maybe next Sunday, when the season is finished, we will know then."
Former Internazionale and Lazio boss Mancini took over from Mark Hughes in December 2009, leading City to FA Cup victory in 2011 and the Premier League title a year later.