The Hornets, who have won nine of their 20 Championship games this season under Ivic, are fifth in the table, four points off second-placed Bournemouth and nine off leaders Norwich.
The 43-year-old signed a one-year deal in August, succeeding Nigel Pearson who was sacked shortly before the club were relegated from the Premier League.
It means Watford are looking for a fifth manager in just over a year.
The Serb’s sacking came after his side were beaten 2-0 at mid-table Huddersfield Town on Saturday -just their second defeat in 11 games – a spell which has also seen them draw four matches.
Ivic followed Javi Gracia and Quique Sanchez Flores, who were both sacked in the early weeks of last season, leading to the arrival of Pearson last December as the latest person to occupy what is arguably the least secure job in English football.
In a short statement the club confirmed Ivic’s departure and that of his coaching team.
“The Hornets thank Ivic and his staff for their efforts this season and wish them well for future success elsewhere,” the statement added.