The 61-year-old manager has been dismissed after the Black Cats fell to a 1-0 defeat against the Premier League leaders, leaving them just one point clear of the relegation zone
The defeat, inflicted by a Titus Bramble own goal, has left the Black Cats hovering just a solitary point above the drop zone and saw their winless run in the Premier League stretch to eight games.
O'Neill, who took over at the Stadium of Light in December 2011 and invested heavily last summer in the likes of Adam Johnson and Steven Fletcher, has been dismissed with immediate effect and a replacement is due to be confirmed in the coming days.
"The club has parted company with manager Martin O'Neill," a statement on the club's official website read. "Sunderland AFC has announced that it has parted company with manager Martin O’Neill this evening.
"The club would like to place on record its thanks to Martin and wishes him well for the future.
"An announcement will be made in the coming days regarding a successor."
Sunderland face Chelsea, Newcastle, Everton and Aston Villa in the coming month, before concluding the season with games against Stoke, Southampton and Tottenham.