A brief statement on the club's official website confirmed that chairman Simon Jordan has terminated Taylor's contract with immediate effect.
Pressure had been mounting on the former England U21 coach over the past few weeks, as a string of lacklustre performances and poor results saw the Eagles slip to 19th in the table.
The final straw came on Saturday, as Palace stuttered to a 1-1 draw at home to Taylor's former club, Hull City.
Taylor labelled his side's performance in the first half of that match as "totally unacceptable".
And the Palace playing legend appeared to throw in the towel when he admitted "I'd love to be top of the table and winning but we don't deserve that. We've only got 10 points."
That latest failure has finally forced Jordan's hand, even though the chairman had hoped to avoid adding to his reputation for quickfire sackings.
It is believed that Jordan already has former Sheffield United boss Neil Warnock lined up to take over in the hotseat.
Peter Taylor had been Palace manager since the summer of 2006, having taken over the job following Iain Dowie's departure. In the 60 games he took charge of there were 21 wins, 15 draws and 24 defeats.