The 38-year-old, who was appointed on a permanent basis in 2024 following an interim spell in charge, paid the price for Hibernian's dismal start to the season.
The Edinburgh club are fourth from the bottom of the Scottish Premiership after losing four of their opening six matches this term, including the last three.
Gray led Hibernian to third place in his first season in charge before making it successive European qualifications with a fifth-place finish last term.
However, he was unable to secure Conference League group phase action on either occasion after agonising defeats in the play-off rounds.
Gray's last match in charge was Tuesday's 1-0 loss at home to Kilmarnock, which was their sixth defeat in 14 games in all competitions this term.
"Ultimately, this is a decision that we have not taken lightly, but unfortunately, one as a board we had to make due to the recent downturn of results and performances," Hibernian executive chairman Ian Gordon said.
Gray, who played for the Easter Road outfit from 2014 to 2021, famously scored Hibernian's stoppage-time winner against Rangers at Hampden Park in the 2016 Scottish Cup final.
Gray's goal ended Hibernian's 114-year wait for a third success in the tournament.