The club revealed only late last month that they planned to hold contract talks with the Scot at the start of 2014 but Saturday's loss was the Baggies' fourth in a row and left them just two points above the drop zone.
The club said the 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.