The 60-year-old, who accepted interim charge of the Turkey national side in August, was relieved of his duties after a disappointing start to the season in his third spell as manager at the club.
Terim attempted to set out positively with the signings of Didier Drogba and Wesley Sneijder, but the big-name transfers have yielded a mixed reaction so far, given the vast amount of investment.
Galatasaray president Unal Aysal had previously aired concerns about Terim's project on the international scene as well as his refusal to accept a two-year contract with the club.
"After Fatih Terim's rejection of our two-year contract offer, the Galatasaray board have been obligated to find new solutions," a club statement said.
"All these developments regarding this issue were harmful to our club and its values. Our board have a responsibility to preserve these values and transmit to next generations.
"By force of this responsibility, in order to prevent our club from getting damaged more, the Galatasaray board decided to terminate Fatih Terim's contract.
"We thank Fatih Terim for his contributions and we would like everyone to know that we will be proud of his future achivements with Turkish National Team."
Galatasaray have registered just six points from four league outings and suffered a 6-1 drubbing in their UEFA Champions League Group B opener against Real Madrid at home, with Cristiano Ronaldo scoring a hat-trick.