The Baggies' 1-0 loss at Cardiff on Saturday means they have picked up just seven Premier League wins during 2013 which a board statement described as 'disappointing' after 'substantial investment in the first-team squad.'
Joint-assistant head coach Keith Downing will take temporary control while the club considers their options and Clarke's assistant Kevin Keen has also been placed on gardening leave.
"This was the unanimous decision of the Football Club's Board of Directors following a disappointing performance throughout 2013," a club statement read.
"Albion have won only seven of their 34 Barclays Premier League games during the calendar year - a 20 per cent win percentage yielding a total of only 31 points - despite a substantial investment in the first-team squad."
Sporting and technical director Richard Garlick added: "We have reluctantly come to the decision to relieve Steve of his duties after very careful consideration.
"It has been well documented that we have not had the rub of the green in certain games this season but that does not cloud the generally disappointing points return during this calendar year, culminating in today's fourth-successive defeat at Cardiff.
"Our player wage bill is the highest in the Club's history and we feel we have built a squad capable of being very competitive in the Premier League.
"We now begin the search to find a new Head Coach who will work within our existing structure, which has been in place for the past six years."
"On behalf of the Board, I would like to thank Steve and Kevin for their efforts over the past 18 months. We wish them and their families well for the future."
Clarke was unveiled as Roy Hodgson's successor in June 2012 and oversaw 19 wins during his 59 games in charge, including a famous 2-1 victory at Old Trafford just three months ago.
The Scot departs the club having lost his last four games which left West Brom in 16th, just two points above the relegation zone.