Colo Colo, administered by the firm Blanco y Negro, said on Thursday they were unhappy with the team's performances under the 56-year-old who took charge in February on a contract until the end of the year.
"We have decided to put an end to the contract with the coaching staff headed by Americo Ruben Gallego," Blanco y Negro president Hernan Levy told a news conference.
"We need Colo Colo's tradition to be better interpreted. We also believe we must take better advantage of the players we have signed recently."
Blanco y Negro, which is quoted on the Chilean stock exchange, invested around $6 million in squad reinforcements for the Clausura, second of two championships in the year.
Colo Colo, who finished the Apertura in eighth place, have taken three points from their two matches and were knocked out in the first round of South America's elite club competition, the Copa Libertadores.
They are the only Chilean team to have won the Copa, in 1991.
Former midfielder Gallego, a 1978 World Cup winner with Argentina who has won league titles as a coach in his country and Mexico, said: "I want to make it clear I did not resign. [The directors] have a different project".
Youth coach Luis Perez was appointed caretaker.
