Saturday's 3-0 defeat by Manchester City left the club in 16th place in the league, two points above the relegation zone, with 13 defeats in their previous 18 matches in all competitions.
"This has been a tough decision," said West Brom chairman Jeremy Peace on the club's official website.
"But we, as a board, believe it is the right one to give the club the best possible chance of remaining in the Premier League."
Former Chelsea midfielder Di Matteo led the Midlands club back to the Premier League last season and won plaudits early in the campaign with a 3-2 away win at Arsenal and a 2-2 draw with Manchester United at Old Trafford.
They even briefly rose into the top four in October.
However, hopes that he could establish them in the top flight after a decade of promotions and relegations to and from the top two divisions have faded. His position was also undermined by exits from both domestic cups against Championship opposition.
"Our poor sequence of results stretches back more than three months and there has been little sign of it coming to an end," Pearce said. "If this run continues much longer, achieving our goal of retaining our Premier League status will become increasingly difficult. That's why we were compelled to act."
First-team coach Michael Appleton has been put in charge of the team while the club "considers its options".
Italian Di Matteo moved into management in 2008 with League One side MK Dons, just missing out on promotion, before moving to West Brom as replacement for Tony Mowbray in 2009.
In his first season he clinched second place in the Championship behind Newcastle United, winning automatic promotion back to the top flight.
Di Matteo is the fourth Premier League manager to lose his job this season, following Roy Hodgson at Liverpool, Sam Allardyce at Blackburn Rovers and Chris Hughton at Newcastle.
