The world's richest football club announced after City's 4-3 home win over Sunderland that Hughes, appointed in 2008 after Sven-Goran Eriksson was axed, had been removed from his post.
Former Inter Milan coach Mancini, who watched the victory from the stands at Eastlands, takes over immediately.
City, whose victory was only their second in their last 11 league matches, are sixth in the standings and still firmly in the hunt for a top four finish this term.
They are also in the League Cup semi-finals where they will play Manchester United over two legs.
"A return of two wins in 11 Premier League games is clearly not in line with the targets that were agreed and set," City chairman Khaldoon Al Mubarak said in a statement.
"(Owner) Sheikh Mansour bin Zayed Al Nahyan and the Board felt that there was no evidence that the situation would fundamentally change," he added on the club website.
DIFFICULT ANNOUNCEMENT
"This is a particularly difficult announcement given the personal investment over the past 15 months on all sides and we would like to put on record our respect for and thanks to Mark Hughes and we wish him the best in his future career."
Hughes enjoyed a glittering playing career as a striker with Manchester United, Barcelona and Chelsea before moving into coaching by taking charge of Wales and narrowly missing out on qualification for the Euro 2004 finals.
He furthered his reputation at Blackburn Rovers where in his four years at Ewood Park they regularly challenged for European qualification and reached three FA Cup semi-finals.
City finished 10th in Hughes' first season at the helm but after spending 115 million pounds on six big signings in the close season, fuelled by the petro-dollars of the club's Abu Dhabi owner, expectations went through the roof.
With the likes of Carlos Tevez, Emmanuel Adebayor, Roque Santa Cruz, Gareth Barry and Kolo Toure added to the squad, City were tipped as top-four contenders.
Even the dream of a first league title since 1968 seemed possible when they began the campaign with four consecutive wins, including a 4-2 home victory over Arsenal.
But a run of seven draws halted their early season momentum and Wednesday's dismal 3-0 defeat at Tottenham Hotspur fuelled rumours that Mancini was being lined as the new manager.
FATE SEALED
Hughes applauded all four sides of the stadium on Saturday and looked grim-faced as he walked down the tunnel for the final time - his fate already sealed.
Mancini, who made his name as a striker at Sampdoria, won three consecutive Serie A titles as coach of Inter Milan before being sacked at the end of the 2007-08 season.
"Roberto is a hugely experienced manager with a proven track record of winning trophies and championships," Khaldoon Al Mubarak said.
"His experience and track record speak for themselves. What is absolutely clear is that Roberto believes in Manchester City's potential to achieve at the highest level and importantly in his own ability to make this happen.
"My hope is that our incredible fans wil
