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Chairman Bob Murray thanked Reid for his efforts with the club that he said had been transformed since the former Manchester City manager's arrival in March 1995.
"Sunderland is totally unrecognisable now to when Peter Reid walked through the door at Roker Park in 1995," Murray told the club's official website.
"In taking this difficult decision it's hard to realise that it's had to come to this, but the club must always come first.
"Nearly a quarter of the season has gone and we're at the wrong end of the table and can't wait any longer for performances to improve.
"We've invested more than £22million in the playing side in the last nine months but unfortunately results have not changed for the better since last season.
"I've enjoyed a close professional relationship with Peter and the board and I'd like to thank him for his significant contribution and efforts for the club in the last seven years.
"I stand by my decision not to change manager during last season as I'm convinced that we would have gone down if we had.
"We will be appointing a successor as quickly as possible and hope to have someone in place before our next league game."
Sunderland scored just 29 Premiership goals last season as they finished just above the relegation zone and they have carried on in a similar vein so far this campaign having scored just four goals in nine games.
David O'Leary, George Graham and Alan Curbishley have already been linked with the vacancy.
