Athletic director Dave Brandon announced the decision after meeting with Rodriguez on Tuesday and again Wednesday morning.
"I have completed a systematic and thorough review of our football program and believe that a change in leadership is necessary," Brandon said. "We have not achieved at the level that I expect."
Rodriguez was just 6-18 mark in Big Ten play and went 11-11 at home.
"Rich is a good person and coach," said Brandon, who marked his first anniversary on the job Wednesday. "It's unfortunate that it didn't work out at Michigan, but I'm sure that Rich and his staff will find opportunities at other institutions. I wish Rich and his family all the best in the future."
Brandon said he will immediately begin a national search for a replacement amid speculation that Stanford coach Jim Harbaugh, a former Wolverines quarterback, and former Michigan assistant Brady Hoke, now San Diego State's head coach, are possible candidates.
Rodriguez, who was the head coach at West Virginia when he was lured to Ann Arbor, finishes 15-22 at Michigan. The school can buy out the final three years of his contract for $2.5 million.
Rodriguez was not immediately available for comment. He and his wife, Rita, drove past TV satellite trucks and reporters camped out near Schembechler Hall's main entrance Wednesday and entered the back door of the indoor practice facility. A team meeting was scheduled for Wednesday afternoon.
Rodriguez's final season was pivotal and it didn't go well on or off the field.
He helped the Wolverines win seven games to earn a postseason bid, then stood helplessly on the sideline on New Year's Day as Mississippi State handed them their worst bowl beating — a 38-point drubbing — in a Gator Bowl loss that looked all too familiar.
Michigan's young defense, which ranked among the nation's worst, was overmatched and quarterback Denard Robinson couldn't consistently make the sensational plays he did during a jaw-dropping start.
Rodriguez finished 7-6, but lost six of the last eight games. The improvement wasn't enough from his 5-7 finish last year and the Michigan-record nine losses in his debut season in Ann Arbor.
He was 1-11 against ranked teams and 0-6 combined against rivals Ohio State and Michigan State.
The season had clearly weighed on Rodriguez.
He surprised supporters and his players at the team's banquet when he broke down and cried, talking about the toll his job had on his family, then quoted the Bible and Josh Groban and played a song from the musician in a surreal scene.
"I truly want to be a Michigan man," Rodriguez declared.
Michigan lured Rodriguez away from West Virginia in messy fashion after the 2007 season. The school Rodriguez had played for and rooted for as a kid had extended his contract a year earlier, and he didn't want to pay a $4 million buyout.
The saga was finally settled when Michigan agreed to pay West Virginia $2.5 million, leaving Rodriguez to take care of the rest.
From the beginning and until the end, he struggled to be accepted. Some wanted LSU's Les Miles to return to Ann Arbor, where he was an assistant for the late Bo Schembechler.
On the field, Rodriguez didn't inherit a roster full of talent from Lloyd Carr. Quarterback Ryan Mallett transferred to Arkansas and offensive guard Justin Boren left for Ohio State, making his transition even more challenging.
The Wolverines took pride in winning with class and by the rules for three-plus decades under Schembechler, Carr and Gary Moeller.
Under Rodriguez, the program was hit by the kind of news it dreaded.
Just before the 2009 season, anonymous players told the Detroit Free Press that the Rodriguez-led program was exceeding NCAA limits on practice and training time.
"We know the rules, and we follow the rules," an emotional Rodriguez declared a day after the report was published.
The school, though, later acknowledged that it was guilty of four violations. It was put on three years of probation, though Rodriguez and the school avoided major penalties in part because the NCAA agreed that the coach didn't fail to promote an atmosphere and compliance in his program.
Still, Paul Dee, chair of the Division I infractions committee, compared the coach's role to that of being captain of the ship.
"The coach is ultimately responsible, but that doesn't mean that the coach is involved in all of the activities that occurred," Dee said. "Some of the things that did occur did not get all the way to the coach, but ultimately, the coach bears a responsibility for the program."
Rodriguez often insisted the off-the-field news — calling it "drama" — didn't affect his team.
"I just think there's a faction — and certainly I wouldn't accuse any of you all — of creating a negative type of environment that wants to create drama and wants to see people point fingers," Rodriguez once said.
Rodriguez is widely considered one of the architects of the spread offense that has become the rage in college football, creating his version of three- and four-receiver sets at tiny Glenville State in 1990.
Rodriguez recruited two freshmen who could lead his offense — Robinson and Tate Forcier — and they helped the 2009 team get off to a strong start that put Michigan on the cover of Sports Illustrated.
Toward the end of the collapsing 2009 season, Rodriguez took a few not-to-subtle shots at Carr and his staff in terms of recruiting talent to Ann Arbor.
"The last three Februarys, or four Februarys, have hurt us a little bit," Rodriguez said less than two years after Michigan hired him. "The next two or three Februarys will be very critical. That's where it starts."
Rodriguez, though, didn't get a chance to finish what he started.