Wolves are 19th in the table with nine points after a 2-1 home loss to Ipswich Town on Saturday extended their losing streak to four league games, with just two wins from 16 matches this season.
They have conceded a league-worst 40 goals and have also struggled with off-field issues, with Mario Lemina being stripped of the captaincy after an altercation with West Ham United's Jarrod Bowen.
"Wolves have parted company with head coach Gary O'Neil and his backroom staff," the club said in a statement.
O'Neil had been very outspoken in his post-match interview following the loss to Ispwich, placing blame on his players after conceding a late set-piece.
"I would happily take that as my fault, that set-play goal, if people were stood in the right place and people were doing their jobs," he told BBC Sport.
"But for that one they weren't and we get badly punished.
"We will continue to try and push this group to its maximum, get them ready to fight every single time and hopefully we can turn this around."
Wolves' next game is away at Leicester City on December 22nd, with tough fixtures coming up against Manchester United and Tottenham Hotspur later this month.
Wolves failed to record a win in their opening 10 league games but successive victories over Southampton and Fulham last month appeared to have eased the pressure to an extent.
However, four straight defeats in their last four games led to O'Neil's sacking, which came just days after club chairman Jeff Shi had thrown his support behind the manager amid fierce criticism from fans.
"We're very grateful to Gary for all of his effort, dedication and hard work during his time at the club, and we wish him and his team the best of luck for the future," Shi said.
Former Bournemouth boss O'Neil, who was under contract until 2026, was appointed by Wolves just before the start of last season after Spaniard Julen Lopetegui, now at West Ham United, parted ways with the club because of disputes with the board.
The Midlands club finished 14th last season, the club's worst position since they were promoted in 2018.
Englishman O'Neil recorded 20 wins, 11 draws and 32 defeats in 63 games in charge of Wolves.
He is the third Premier League manager to be sacked this season after Steve Cooper and Erik ten Hag.