Solskjaer leaves with United already realistically out of the Premier League title race.
Manchester United have ended Ole Gunnar Solskjaer's three-year reign as manager at Old Trafford.
But the club plans to wait until the end of the season to name the Norwegian's permanent successor.
"Ole will always be a legend at Manchester United and it is with regret that we have reached this difficult decision," the club said in a statement on Sunday.
Saturday's 4-1 embarrassment at the hands of struggling Watford was the final straw for the United board, who had stuck by Solskjaer in recent weeks despite humiliating home defeats to Liverpool and Manchester City.
"While the past few weeks have been disappointing, they should not obscure all the work he has done over the past three years to rebuild the foundations for long-term success," the club said.
Solskjaer leaves with United already realistically out of the Premier League title race, 12 points behind leaders Chelsea down in seventh in the table, and having exited the League Cup.
Former midfielder Michael Carrick, who was part of Solskjaer's coaching team, will take charge of the forthcoming games while the club look to appoint an interim manager till the end of the season.
Another defeat in Spain would leave the Red Devils needing both results in the final round of matches in Group F to go their way to avoid crashing out at the group stage for a second consecutive season.
A run of five defeats in Solskjaer's final seven league games contrasts sharply with the anticipation that surrounded the club in August when Cristiano Ronaldo made a surprise return to Old Trafford in the final days of the transfer window.
United also spent over $134 million on Jadon Sancho and Raphael Varane as they looked to build on finishing second in the league to Manchester City last season.
However, Solskjaer was unable to assemble the pieces of his star-studded squad into a collective unit despite Ronaldo's return of nine goals in 14 games.
"We don't know what to do with the ball, we don't know how to defend properly and we're conceding a lot of goals," said United goalkeeper David de Gea, whose double penalty save from Watford's Ismaila Sarr counted for nothing.
"It's not acceptable for this club and the level of players that we have. It's another nightmare."
Zinedine Zidane, who won three Champions League titles with Ronaldo and Varane at Real Madrid, is the bookmakers' favourite to succeed Solskjaer, with Leicester manager Brendan Rodgers and Ajax boss Erik ten Hag also in contention.
The decision to wait until the summer to make a permanent appointment could open up a wider pool of potential candidates, including Paris Saint-Germain boss Mauricio Pochettino, who has previously been linked with the job.
READ MORE: Manchester City crush crisis-stricken United