Clarke's side were beaten 1-0 by Cardiff on Saturday, a result which left the Baggies two points above the relegation zone.
Albion have won only seven of their 34 Premier League games in 2013 and their last point was in a 2-2 draw with Aston Villa back in November.
It's a swift turnaround in fortunes as West Brom finished eighth last season but have struggled without striker Romelu Lukaku, who scored 17 league goals while on loan from Chelsea. He has since moved on loan to Everton where he is having another massive impact.
A club statement said Clarke has been placed on gardening leave with immediate effect.
Joint-assistant head coach Keith Downing will take control of first-team affairs while the club look for a new head coach.
Clarke's other assistant Kevin Keen has also been placed on gardening leave.
It will come as a surprise to many but West Brom sporting and technical director Richard Garlick said: "We have reluctantly come to the decision to relieve Steve of his duties after very careful consideration.
"It has been well documented that we have not had the rub of the green in certain games this season but that does not cloud the generally disappointing points return during this calendar year.
"This club's track record proves we do not take such decisions lightly, having only enforced a change in this position three times in approximately 14 years.
"But with key games coming thick and fast, we felt it was important we acted now to give the club the best possible chance of a successful outcome this season.
"Our player wage bill is the highest in the club's history and we feel we have built a squad capable of being very competitive in the Premier League."