Pearson guided Leicester to top-flight safety in the final matches of last season after they appeared to be doomed to relegation and they finished 14th in the Premier League.
The club said their directors recognised the success Pearson had brought Leicester in his two spells in charge.
"However, it has become clear to the Club that fundamental differences in perspective exist between us. Regrettably, the Club believes that the working relationship between Nigel and the Board is no longer viable," the statement said.
"Leicester City’s owners, Vichai and Aiyawatt Srivaddhanaprabha, and the board of directors would like to place on record their thanks to Nigel for the considerable contribution he has made during his time with the Club and wish him well in the future."
The statement added that the owners had always acted in the best interests of the club and remained "wholly committed" to development and investment so that Leicester would remain competitive in the Premier League.
Assistant managers Craig Shakespeare and Steve Walsh will take charge of the first team while the club look for a new manager.
Pearson, 51, took over for a second spell at Leicester in November 2011 and led them back to the Premier League from the Championship.
(Reporting by Justin Palmer and Clare Lovell; Editing by Ed Osmond)
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