Ismael had been in charge since October but failed to lift the 2009 champions out of the lower half of the table, with Wolfsburg having lost four of their last five league games. They won six games out of 17 in all competitions under Ismael.
"After weighing all the facts and conditions we agreed that parting ways would be the right measure in order to bring the team back onto the track of success," Wolfsburg sports director Olaf Rebbe said in a statement.
Frenchman Ismael, a Wolfsburg under-23 coach, was first made interim manager to replace Dieter Hecking, who was dismissed after a disappointing start to the season. He was given a permanent deal in November.
The club said it planned to unveil a new manager on Monday. Wolfsburg are 14th in the 18-team Bundesliga table.
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(Reporting by Karolos Grohmann; Editing by Ken Ferris)
