Bolton find themselves in 18th place in the Championship with just 11 points from their first 10 games and Coyle, who played for the club between 1993-95, has paid the price for his side's slow start.
His final game in charge ended in a 2-1 defeat at Millwall on Saturday which left the club, who were expected to immediately challenge for promotion back to the top flight, just three points above the relegation zone.
Chairman Phil Gartside has been a fierce defender of the Scot since luring him from Burnley in January 2010, but relegation from the Premier League has not been followed by strong early form.
Gartside said: "Owen poured his heart and soul into the job, both on and off the pitch, and he led our club with great dignity during some very challenging times.
"It is the right time for a change. We set a target at the beginning of the season and want to get back on track. I would like to place on record our sincere thanks to Owen, Sandy Stewart and Steve Davis for all their hard work during their time at Bolton Wanderers."
Coyle said: "I have always been driven to act in the best interests of the club and care passionately about it. I had fantastic times here as a player and it has been a privilege to have held the post of manager.
"I want to thank the fans for their backing since I returned, the chairman Phil Gartside and the owner Eddie Davies for their support and friendship and the club’s staff and players for all their effort and commitment. I wish everyone connected with Bolton Wanderers all the very best."
The Trotters are now expected to act swiftly to replace the 46-year-old, with academy manager Jimmy Phillips and head of academy coaching and development Sammy Lee to take temporary charge of the first team squad.