The decision follows a 1-0 home defeat by Queens Park Rangers that left them in ninth place.
Although only one point outside the playoff places, they have dropped from third position in the past few weeks.
Last month he was interviewed for the vacant manager's job at Fulham but decided to stay with Reading.
"Following Thursday night's defeat at home to QPR, added to a recent run of poor form which has seen the team pick up just one win in the last eight Sky Bet Championship fixtures, the board feel that a change in manager is now necessary," said a statement on the club's website (www.rteadingfc.co.uk).
Clarke, a former assistant at Newcastle United, Chelsea, West Ham and Liverpool, managed Premier League side West Brom from 2012-14, joining Reading 12 months ago.
(Reporting by Steve Tongue; editing by Sudipto Ganguly)
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