Clarke had been set for fresh contract talks in the New Year but Saturday's loss was the Baggies' fourth in a row and left them just two points above the drop zone.
The club said Saturday evening's decision to dispense with the Scot - and place him, along with assistant Kevin Keen, on gardening leave - was the board's unanimous decision.
Joint-assistant head coach Keith Downing will assume control of first-team affairs while the club searches for a successor.
Sporting and technical director Richard Garlick told the club's official website: "We have reluctantly come to the decision to relieve Steve of his duties after very careful consideration.
"It has been well documented that we have not had the rub of the green in certain games this season but that does not cloud the generally disappointing points return during this calendar year, culminating in today's fourth-successive defeat at Cardiff.
"This club's track record proves we do not take such decisions lightly, having only enforced a change in this position three times in approximately 14 years.
"But with key games coming thick and fast, we felt it was important we acted now to give the club the best possible chance of a successful outcome this season.
"Our player wage bill is the highest in the club's history and we feel we have built a squad capable of being very competitive in the Premier League."
Clarke replaced Roy Hodgson at The Hawthorns in June 2012, assuming his first managerial role following spells as assistant boss at Chelsea, West Ham and Liverpool.
He guided Albion to eighth last season but a late-season slump continued into the new term, with only seven wins from 34 Premier League games during the calendar year.
Baggies midfielder Youssouf Mulumbu was swift with his show of support for Clarke, writing on Twitter: "Sad day and really sad news to hear about Steve Clarke getting sacked. I feel sorry for the manager, us players are on the pitch but he's the one getting the consequences of our bad play."
Glenn Hoddle, who worked with Clarke during his time at Chelsea, told Sky Sports that he was disappointed with the decision, saying that West Brom should have kept faith with their manager.
"I am surprised and shocked actually. Steve did a really good job there last year," said Hoddle.
"I think they were probably going to look up from where they ended up last season, they wanted to improve on that place, and for me they are four points from tenth place, so it is very early in the season.
"I am disappointed for Steve. I had Steve as a player when I was a manager at Chelsea. He was a great lad and has learned a lot from other coaches.
"West Brom, no disrespect, will have a slight bad run in any season, like a lot of other clubs, and that is when you have to stick by your manager."
Sky Bet quickly installed Roberto Di Matteo, who spent almost two years in charge at The Hawthorns between 2009 and 2011, as favourite to replace Clarke, with ex-Fulham boss Martin Jol also tipped as a frontrunner.