Pearce, who had held the job since 2007, presided over three consecutive defeats to Italy, Norway and Israel as the Three Lions crashed out at the group stage.
FA chairman David Bernstein said: "I'd like to thank Stuart Pearce for his hard work. Nobody can doubt his commitment to the job."
"He has done extremely well in qualifying for Finals tournaments, but after the disappointment of the past two tournaments, we believe it is time to change coach.
"On behalf of everyone at The FA I'd like to wish Stuart well for the future."
Bernstein added: "It is important the organisation now considers the best approach for the role of Under-21 coach and how this works best within the overall England structure before making any new appointment."
After losing 1-0 to tournament hosts Israel last week, Pearce was uncharacteristically critical of his players, saying: "If you don't turn up and work hard enough in any given tournament, you won't get any success and that was typical of today and probably the two games prior to it.
"I honestly don't believe I should be here answering questions on behalf of them. They should be here answering questions on why their performances were so poor."
The 51-year-old Pearce led Great Britain at the London Olympics, where they lost on penalties to South Korea.
The fiercely patriotic defender won 78 England caps as a player before embarking on a managerial career at Nottingham Forest and Manchester City.
Despite infamously playing goalkeeper David James up front on the final day of the 2004/05 season, Pearce was touted as a possible senior England boss when he took over the Under-21 side.
However, his role came under increasing scrutiny and a calamitous performance in Israel sealed his fate.
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