Wolves have won just one and lost nine of their past 15 Premier League matches under the Portuguese.
Lage succeeded Nuno Espirito Santo last summer and led Wolves to a 10th-placed finish in his first season in charge.
However, his side have only scored three goals and picked up six points from eight games this season.
The decision has come after high-level meetings in the wake of Saturday’s 2-0 defeat at the London Stadium, which raised renewed questions over the former Benfica boss.
The club hierarchy felt the current run of form was a poor return given they have spent in excess of £100m on new players this summer.
They brought in Portuguese internationals Goncalo Guedes and Matheus Nunes, with the latter bought for a club record fee of £38m.
Lage, 46, also signed veteran forward Diego Costa, who had been a free agent for nine months and made his first competitive appearance since December 2021 against West Ham.
However, £15m summer signing Sasa Kalajdzic damaged knee ligaments days after his move from Stuttgart and key striker Raul Jimenez suffered knee and groin injuries in a pre-season friendly.
Wolves fans turned against Lage at the London Stadium, singing ‘you don’t know what you’re doing’ at the Portuguese as their team slipped to defeat.
They are winless in eight Premier League away games – their worst top-flight run since 2011-12.
The manner of the defeat left club officials believing they had little alternative than to part company with Lage, who started with a back three despite allowing popular skipper Conor Coady to leave for Everton in August because he wanted to play with two at the back.
“The only thing I can say is that I’m sorry about the situation,” Lage said in his final post-match news conference as manger.
“We’ve tried to solve these little problems we have and at the moment we aren’t getting points or goals, but we are working hard for them.”
Lage’s replacement will be Wolves’ third Premier League manager since Terry Connor in 2012.
It is thought unlikely Wolves will have a new man in place for Saturday’s trip to Chelsea.