Mano Menezes was dismissed because the president of the Brazilian Football Confederation (CBF) wants a fresh start, Andres Sanchez, the CBF's National Teams Director, said at a news conference in Sao Paulo.
"I don't think it was for negative results, if that was the case he could have been fired last year," said Sanchez. "It was that the president wants to change the way things are done."
A new coach will be chosen in early January, Sanchez added.
Menezes had been in charge since replacing Dunga shortly after Brazil's early exit from the 2010 World Cup and was criticised for their failure to beat rivals like Netherlands and Germany and for what many fans saw as a defensive style.
Brazil is preparing to host the World Cup for the first time since 1950 and is desperate to lift the trophy on home soil. It is the only country to appear in every World Cup finals and the only nation to win it five times.
In 40 games, Menezes's side won 27, lost seven and drew six, according to his official website.
But with Brazil qualifying automatically as hosts for the next World Cup, most of these games were friendlies, often against weak opponents such as China and Iraq.
Under Menezes, Brazil struggled against soccer powers such as Germany, Netherlands, and world and European champions Spain.
Menezes also failed to guide his side to victory in last year's Copa America and in the Olympics, when his under-23 team surrendered meekly to Mexico in the final in London.
Although he brought a quiet elegance to the team set up off the field, the former Corinthians boss was not universally popular and was even booed by his own fans in recent months.
Brazil are 13th in FIFA's world rankings, just one place above their lowest ever position, but many Brazilians feel the team should be demolishing opponents like South Africa.
When they struggled to beat Bafana Bafana 1-0 in a friendly in Sao Paulo in September, fans jeered Menezes and key striker Neymar. Some of them celebrated Menezes's demise on Friday.
"This is a good day for Brazilians. Now we can win," said psychologist Sergio Gomes, giving a thumbs-up sign of approval at a bar in the capital Brasilia.
Former Brazil great Romario also lauded the decision, calling it "overdue" and "a historic day in which Brazil should be letting off fireworks and partying."
INTENSE PRESSURE
However, the timing of Menezes's sacking was a surprise.
It came two days after Brazil won the annual Superclasico de las Americas by overcoming Argentina on penalties in Buenos Aires and less than a week after CBF president Jose Maria Marin said he would decide on Menezes's fate in the new year.
Menezes's side had even shown signs of gelling in recent games. They won six of eight matches since the Olympics, scoring 26 goals in the process.
The pairing of Paulinho and Ramires in midfield gave the team a powerful engine. In Oscar, Neymar and Hulk, Menezes introduced three players who can trouble any defence.
With Thiago Silva in commanding form at the centre of defence and Kaka back to provide some experience, the team was starting to look more robust and dangerous.
Menezes made a brief statement on Twitter thanking the players and staff and wishing the squad the best of luck.
"I wish every success to the Brazilian national side in realising the fans' dream of winning the World Cup for a sixth time in 2014," he said.
Despite Menezes's lack of popularity, the decision to fire him was not unanimous.
"I don't think we should be changing tack at this time," Sanchez, who hired Menezes and was a close friend, t old reporters. "But I was overruled."
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