The 35-year-old was shown the door following Tuesday's 2-1 defeat at Bari, their second straight loss in Serie B.
Under Gattuso, Palermo have won just two of their opening six games, not enough to impress Palermo president Maurizio Zamparini, who has opted to make a coaching change.
A statement from the club read: "It is with true and profound sadness that I announce the dismissal of Gennaro Gattuso as coach of the first team.
"The results have forced us to take this decision.
"Perhaps he (Gattuso) and I have taken a step too far in what was his first experience as coach, in a club and a city as challenging as Palermo is.
"I have decided to appoint experienced Giuseppe Iacchini as his replacement, handing him the task to lead the team back to Serie A."
Palermo were relegated to the second tier last season.
Gattuso joined the Sicilian giants this summer after a spell as a Sion player-coach last term.
He becomes the 20th manager to be sacked by Zamparini since the Italian businessman bought Palermo 11 years ago.