Gazzayev, who led CSKA Moscow to UEFA Cup success in 2005, submitted his resignation following a 2-0 defeat by Moldova's Sheriff Tiraspol in a Europe League match on Thursday.
The result left Dynamo bottom of Group E with just a point from two matches.
Former Ukraine, Dynamo Kiev and Arsenal defender Oleg Luzhny was named caretaker coach, Dynamo said on their website.
Gazzayev, appointed in May 2009, tried to quit after a 2-2 draw at home to BATE Borisov of Belarus in their group opener two weeks ago but was persuaded to stay by Dynamo boss Igor Surkis.
"I'm very disappointed," Surkis told local media on Friday. "I believed in Gazzayev and still think he's a strong coach but, unfortunately, here he could not produce the goods.
"On Friday, (Gazzayev) again expressed his desire to resign and this time we agreed that it was the right decision. Maybe it came too late, maybe not, but it had to be done."
Dynamo, the most successful Ukrainian club with a record 13 league titles since the championship was founded in 1992 following the collapse of the Soviet Union, have also fallen behind arch-rivals Shakhtar Donetsk in domestic competition.
‘The pure simplicity of the way Slot has managed the squad is probably the biggest thing I could say about him. It’s not broken, so let’s get on with it’: Liverpool legend full of admiration for Jurgen Klopp's successor at Anfield
‘I trained at Spurs and thought they’d give me a chance. But I received a letter thanking me but saying they didn’t think I was good enough – I was gutted’: How Tottenham missed out on signing Wales legend John Toshack
