The 53-year-old, assistant manager to Claudio Ranieri when Leicester stunned the sporting world to win the 2015-16 Premier League title, assumed a caretaker role in February after Italian Ranieri was sacked with the club in the relegation zone.
Shakespeare inspired a quick turnaround in fortunes, leading the club to safety and into the quarter-finals of the Champions League and was rewarded with the permanent job in June.
Since Ranieri's exit Leicester have taken 29 points, behind only Tottenham Hotspur, Manchester City, Chelsea, Manchester United, Liverpool and Arsenal.
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Yet with only one win in their opening eight games this season, Leicester find themselves back in the same position they occupied when Shakespeare first took up the reins -- in the bottom three.
In a statement on the club's website vice-chairman Aiyawatt Srivaddhanaprabha thanked Shakespeare for his service with the club but said a change was needed.
"Our early promise under Craig's management has not been consistently evident in the months since and the board feels that, regrettably, a change is necessary to keep the club moving forward," he said.
"His dedication to the club and to his work has been absolute and the contribution he made to the most successful period in Leicester City history is considerable."
Shakespeare had been part of Leicester's coaching set-up since 2011 and was widely credited as the tactical mastermind behind the title-winning side. He was also popular with the players.
After stepping into the breach following Ranieri's dismissal, Shakespeare won his first five games at the helm and guided Leicester to a 12th-place finish.
They also completed a last-16 victory over Sevilla in the Champions League before suffering a narrow defeat to Atletico Madrid in the quarter-finals.
Leicester lost key midfielder Danny Drinkwater to Chelsea on the final day of the summer transfer window and although they signed the likes of Manchester City striker Kelechi Iheanacho and Hull defender Harry Maguire, results this season have been disappointing.
Their only victory so far in the Premier League came against newly promoted Brighton and Hove Albion in August.
Shakespeare has not been helped by a tough run of fixtures which included matches against Arsenal, Liverpool, Chelsea and Manchester United -- all of which ended in defeats.
November offers an easier run, with games against Swansea City, Everton and Stoke City as well as a League Cup tie against second-tier Leeds United.
Leicester have appointed Shakespeare's assistant, Michael Appleton, as caretaker manager while they seek a new permanent appointment, and he will take charge for the Swansea game, supported by first team coaches Mike Stowell and Adam Sadler.
Shakespeare is the second top-flight manager to lose his job this season after Frank de Boer lasted only four league games.
(Reporting by Martyn Herman, editing by Ed Osmond, Neville Dalton)
