The Spaniard, 51, led his side to the Gulf Cup final in November, but they suffered a 2-1 loss to Qatar in the decider.
A board meeting on Friday led to the contracts of Lopez Caro and his assistants being terminated, the Saudi Arabia Football Federation said in a statement on its website.
It leaves Saudi Arabia searching for a coach ahead of the Asian Cup starting on January 9, 2015.
They are in Group B with Uzbekistan, China and North Korea as they look to win the trophy for a fourth time.
Lopez Caro previously coached the likes of Real Madrid and Levante.
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