The 63-year-old Swede joined Leicester in October 2010 and although the team have struggled for consistency early in the season, they are just eight points off the top of the table.
"Leicester City Football Club has confirmed today that, by mutual agreement, Sven-Goran Eriksson has ceased to be the first team manager, with immediate effect," the club said in a statement on their website.
The Midlands club are 13th in the second division standings following a 3-0 home defeat by Millwall on Saturday. First-team coach Derek Fazackerley has also left the club.
"The club and its board of directors would like to thank Sven and Derek for the contribution they have made to Leicester City during their 13 months at King Power Stadium," the club said.
After making his name in Italy where he won the Serie A title with Lazio, Eriksson became the first foreigner to coach England when he was appointed in 2001, a position he held until 2006.
He has also had spells in charge of Italian clubs AS Roma, Fiorentina and Sampdoria, England's Manchester City and Notts County and the national teams of Mexico and Ivory Coast who he led to the 2010 World Cup.
Former Leicester, Celtic and Aston Villa manager Martin O'Neill is among the names being linked with the vacant manager's job.
Academy director Jon Rudkin and coach Mike Stowell will jointly assume the role of acting manager.
