Gareth Bale has given a strong indication that he expects to remain with Real Madrid next season.
Bournemouth have signed Artur Boruc on a permanent deal following his release by Southampton.
In his six years at the helm, the former international full-back led the Young Lions to four successive European Championship finals.
Pearce's side finished runners-up to Germany in the 2009 edition but things have regressed since and they left this summer's tournament in Israel without a point to their name.
That, coupled with England's group exit two years ago, led to the FA's confirmation today that Pearce will leave when his contract expires at the end of the month.
"I'd like to thank Stuart Pearce for his hard work," chairman David Bernstein said.
"Nobody can doubt his commitment to the job throughout his time as under-21 coach.
"He has done extremely well in qualifying for finals tournaments, but after the disappointment of the past two tournaments, we believe it is time to change coach.
"On behalf of everyone at the FA I'd like to wish Stuart well for the future."
Glenn Hoddle, Michael Appleton and Phil Neville have all been linked to the post, although Gareth Southgate is overwhelming favourite.
The former Middlesbrough boss worked as the FA's head of elite development until last year and on Tuesday evening was 8/11 with bookmakers Sky Bet to succeed Pearce.
With the future in mind, Bernstein added: "It is important the organisation now considers the best approach for the role of under-21 coach and how this works best within the overall England structure before making any new appointment."
The Club England board's decision comes as no major surprise, but will undoubtedly disappoint some of the players.
Danny Rose admitted they let down Pearce in Israel, while captain Jordan Henderson expressed his desire for the former full-back to be kept on.
Andre Wisdom, Connor Wickham and Jack Butland - all eligible for 2015 edition - also backed Pearce, with the latter particularly vocal.
Meanwhile, former senior team manager Steve McClaren wants the FA to follow the likes of Italy and Holland by appointing an experienced head of youth development.
"It is a great period now to reflect," he told Sky Sports. "When you talk about adversity, failure, losing in a big tournament, like the other countries, it is time to reflect.
"It is time to say at the elite end, what is our vision? Where do we want to be in five or 10 years? Competing to win trophies.
"What is our philosophy? How do we do it? So look at the four components - physically, technically, tactically, mentally - and ask what are we lacking?
"Then we need to say 'we need to work on technique, work tactically and on intelligence', but the key thing is players don't develop that without good coaching.
"It is talking about taking coaching all the way back to that level and I know they are working on that at the FA at the present moment with Dan Ashworth, technical director at St George's Park.
"They are doing that at grassroots level but this elite level they need somebody at the top with experience.
"We talked about Arrigo Sacchi with Italy and Louis van Gaal doing that philosophy with Holland - experienced coaches setting the vision, starting the philosophy. It starts at the top and works down.
"Starting at the bottom with the coaches, working up, you'll eventually have a conveyor belt, like the Spanish, of players who can do all four components of the game."