McCarthy, 53, was appointed Wolves manager in July 2006, winning promotion to the Premier League in 2009 but has lost his job following Wolves' fourth successive home league defeat.
In a statement on their website, the club said it was "a difficult decision to terminate Mick's contract" but that assistant Terry Connor would take charge of training until a new manager is appointed.
Sunday's defeat means Wolves have picked up only one point from their last six home matches and have won only once in their last 13 in all competitions.
McCarthy said on Sunday: "I would say this is my most difficult day as a manager. I have apologised for the performance and I have never done that before.
"But I feel it is warranted - we were awful in the last half an hour. We capitulated which is not something associated with me or my teams. It was very disappointing."
Wolves, one of England's top clubs in the 1950s, winning the title in 1954, 1958 and 1959, later fell as low as the fourth division in the late 1980s before climbing back to the top.
