A 1-0 loss at home to struggling D.C. United on Saturday left Toronto third in the Eastern Conference standings and five points out of a play-off position.
Having removed Radosavljevic from his duties, the club appointed his assistant Nick Dasovic as interim head coach.
"This was a difficult decision but one that was made in both the short-term and long-term interest of the club," Toronto's executive vice president Tom Anselmi said in a statement.
"At the start of the season, we set a team goal of improving on last year's record and making the play-offs. Anything less would be unacceptable to our club and our supporters.
"We felt we had to make this move... to best position the team for the final push for the playoffs as well as for its long-term success."
Former Everton and Portsmouth winger Radosavljevic, known simply as 'Preki', joined Toronto last November after leading the Los Angeles-based Chivas USA into the play-offs in each of his three seasons in charge.
The former U.S international was the MLS coach of the Year in 2007 but he leaves Toronto with a record of 7-10-7.
Former Scotland international striker Maurice "Mo" Johnston was appointed Toronto's first director of soccer on August 25 2006.
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