The defeat, inflicted by a Titus Bramble own goal, has left the Black Cats just one point clear of the relegation zone as it extended their winless run in the Premier League to seven games.
O'Neill, who took over at the Stadium of Light in December 2011, has been dismissed with immediate effect.
"Sunderland AFC has announced that it has parted company with manager Martin O’Neill this evening," a statement from the club reads. "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."