Labbadia was informed of his fate at an emergency club meeting, which was called in response to Sunday's crushing 5-1 defeat to Hoffenheim.
Labbadia leaves after less than ten months in charge and just days before the club face Fulham in the second leg of their Europa League semi-final, a game upon which their whole season now depends. The tie is goalless after the first leg in Germany.
Ricardo Moniz, part of the coaching staff under Labbadia, will take charge for Thursday's return leg and for the remainder of the season.
"We have analysed the situation last night and this morning and decided together that we did not want to continue in this situation," said Hamburg chairman Bernd Hoffmann. "Ricardo Moniz will take charge of the team until the end of the season. He is incredibly enthusiastic, knows the team and English football well and lives for football."
Sunday's damaging defeat left Hamburg five points behind sixth-placed Stuttgart, who hold the last European berth with just two games remaining. Hamburg's best chance of qualifying for Europe next season therefore rests on beating Fulham and going on to lift the Europa League trophy at their own stadium on 12 May. "There was no alternative to this," added Hoffmann. "We need to improve the probability of us being successful on Thursday."
Hamburg's season started brightly and the arrival of Ruud van Nistelrooy in the winter was taken as an indication they could challenge for honours. But a run of just four wins since January has derailed title ambitions.