The Potters are currently lying 21st in the Championship table.
Former Northern Ireland boss O’Neill took charge at the club in November 2019, succeeding Nathan Jones, with them bottom of the second tier at the time.
They went on to finish 15th that season, then 14th in each of the next two campaigns.
Stoke – who this term have also been eliminated from the Carabao Cup by League One Morecambe – are next in action when they take on Blackburn at Ewood Park on Saturday.
Stoke joint chairman John Coates said in a statement on the club’s website: “Michael joined us in November 2019 when the club was in a difficult situation and the job he did in stabilising our position in the Championship should not be underestimated.
“Michael has worked tirelessly and with extreme professionalism, in particular in reshaping our squad and developing young players, but we feel the time is right to move in a different direction. I would like to thank him for his efforts and wish him every success for the future.
“Assistant manager Dean Holden will take interim charge of the first-team. The club has begun the process of appointing a new manager and will be making no further comment at this time.”