The decision by the club's board comes following the Leesiders 2-1 defeat on Friday evening to Munster rivals Limerick, a result which leaves them in seventh place in the Airtricity League and just five points from safety.
The Rebels have picked up just eight points from the last thirteen games and Dunne admitted that his side had been dragged into a relegation dogfight before his departure was announced on Saturday morning.
"Cork City FC and first team manager Tommy Dunne have parted company with immediate effect," a club statement read.
"Stuart Ashton will take over the role of caretaker first team manager on a week to week basis. Stuart, who first joined the club as a professional in the 1984 season, has over the last decade established himself as the country’s premier underage manager, having won every honour open to Cork City FC underage teams, most recently retaining the Under 19 National League and Cup double."
Dunne took over the reins at Turner's Cross in February 2010 and led City back to the Premier Division at his first attempt before consolidating their position in the top-flight with a mid-table finish last year.
However, he has not been able to replicate his success during a largely inconsistent and frustrating campaign which has seen Cork win just four times.Cork City chairman Michael Ring explained the reasoning behind the difficult decision and was quick to thank the outgoing manager for the hard work he did during his eighteen months at the club.
"The board have not come to this decision lightly or hastily, and we are extremely grateful to Tommy for all he has done for us over the last few years," he said. "We will always remember his time here fondly and wish him the very best for the future, but we feel our decision is in the best interests of the club."
Stuart Ashton will take charge of the side for the visit of Premier League side West Brom on Tuesday for a mid-season friendly before the Rebels welcome Bohemians to Turner's Cross on Friday with three crucial points up for grabs.
Meanwhile, Sligo Rovers have completed the signing of former Stoke City goalkeeper Matthew Gledhill.
Bit o' Red boss Ian Baraclough said that he was "very pleased" to have brought the 19-year-old shot-stopper to the Showgrounds.
"Matthew had lot of goalkeepers to compete with at Stoke and it is to our benefit now that he makes the move to Sligo," he said. "He has a bright future, he has worked with some very good goalkeepers and picked up some good habits so we will see where it can go now. We're very pleased to bring him in.
"I think Ciaran Kelly has really pushed Gary Rogers this season and he can count himself somewhat unfortunate at times. He is pushing it all the time and Matthew will add to that now."