McCarthy's side slipped to a 5-1 defeat to Black Country rivals West Brom at Molineux on Sunday, a result which saw them fall to 18th in the Premier League.
Assistant boss Terry Connor has been appointed as interim manager until a new full-time boss has been named.
A statement on the club's official website said: "Wolves have today announced that manager, Mick McCarthy, has left the Club with immediate effect.
"The Board took the difficult decision to terminate Mick's contract after a run of form which has seen Wolves pick up only 14 points in the last 22 League games, after a promising start to the season, culminating in yesterday's 5-1 defeat at home to West Bromwich Albion.
"Terry Connor will take charge of team training in the interim until a new manager is appointed.
"The Board would like to place on record their sincere thanks and appreciation to Mick McCarthy and he leaves with the very best wishes of everyone connected to the Club."
McCarthy was appointed as Wolves boss in 2006 after a stint with Sunderland in which he led them to the Championship title in 2008/9 season, he had also managed the Republic of Ireland.
For the past two seasons the 53-year-old had kept the club in the Premier League finishing 17th and 15th respectively.