A club statement said: "The board of directors understands that there is a great disproportion between the quality of the staff of Real Madrid, which has eight players nominated for the next Ballon d’Or, something unprecedented in the history of the club, and the results obtained to date."
Santiago Solari, the club's B team coach, has been put in temporary charge and is expected to lead Madrid for their Copa del Rey game against Melilla on Wednesday.
Solari could also remain in post for Saturday's La Liga match at home to Real Valladolid.
Lopetegui's last game as coach was a 5-1 annihilation at arch rivals Barcelona who returned to the top of the table while Madrid languished in ninth place, seven points off the pacesetters. It was Madrid’s fourth defeat in 10 La Liga games.
"This decision, adopted from the highest level of responsibility, aims to change the dynamics of the first team, when all the objectives of this season are still achievable," the club statement added.
For 52-year-old Lopetegui, the two biggest jobs in Spanish football have been lost in less than five months. His decision to join Madrid irked the Spanish FA who sacked him as manager of Spain two days before the start of the World Cup in Russia.
Spain – under Fernando Hierro - subsequently went out in the last 16 against Russia.
At Madrid, Lopetegui was charged with leading a team without the goal machine Cristiano Ronaldo who left for Juventus.
The Portugal international had racked up more than 300 goals in 292 appearances during his nine year spell.
Madrid president Florentino Perez opted against signing a high-profile replacement. However, up front, Gareth Bale and Karim Benzema have failed to fill the void.
Defenders Sergio Ramos and Raphael Varane as well as goalkeeper Thibaut Courtois have not been able to provide solidity at the back.
"It is not just Julen's fault", said the headline on the front page of Marca, Spain's biggest selling daily, on Monday.
But Lopetegui, unlike Perez or the Real Madrid squad, is the man carrying the blame.