The 48-year-old has been forced out of Molineux after the club's relegation to League One following a 2-0 loss at Brighton on the final day of the Championship season
A club statement read: "Manager Dean Saunders has been informed by Wolves that his contract is to be terminated.
"The decision has been made following confirmation of Wolves’ relegation to npower League One.
"Assistant Manager Brian Carey will also be leaving the club.
"Wolves have now begun a recruitment process, which, in conjunction with the board, will be managed by head of football development & recruitment Kevin Thelwell.
"The club will now take as long as is necessary to make this crucial appointment and there will be no publicly communicated timescales.
"Wolves would like to thank Dean and Brian for their efforts in what has been a very difficult period for everyone, and wish them both the very best for the future.
"The club will be making no further comment at this stage."
Saunders left Doncaster Rovers to take over at Molineux in January with the club in 18th place in the Championship.
But the ex-Liverpool and Aston Villa striker only oversaw five wins in 20 games as Wolves manager, a run which saw them fall to their second successive relegation.
The club's owner, Steve Morgan, made no mention of the Welshman in an apologetic statement he issued several hours after his team's fate was sealed on Saturday.