The Italian, 70, was appointed on 4 October but managed only seven points from 13 Premier League games.
Last Friday’s 3-0 home defeat to Norwich saw Watford drop into the bottom three and prompted the club’s owners to take action.
It means Watford are looking for their 15th manager since the Pozzo family took over in 2012.
Ranieri, who famously won the Premier League title with Leicester in 2015-16, was given a two-year contract after replacing Xisco Munoz.
However, Watford managed just two wins under the former Sampdoria boss and he departs with the club 19th in the table, two points from safety.
They have lost seven of their previous eight Premier League games and next travel to relegation rivals Burnley on Saturday 5 February in a huge game at the bottom of the table.
The Hornets have lost 11 of their 14 games under Ranieri, 10 in the Premier League and a 4-1 loss to Leicester in the third round of the FA Cup.
It is the eight managerial change in the league this season following the departures of Xisco, Steve Bruce (Newcastle), Nuno Espirito Santo (Spurs), Daniel Farke (Norwich), Aston Villa (Dean Smith), Ole Gunnar Solskjaer (Manchester United) and Rafael Benitez (Everton).
BBC