Assistant Frank Vogel has been named interim coach and will take over an Indiana team currently 10th in the Eastern Conference.
O'Brien was in his fourth season as coach and compiled a 121-169 record with the Pacers, including a 17-27 mark this season.
The Pacers, losers in seven of their last eight games, have not reached the postseason since the 2005-06 campaign.
"These decisions are never reached easily," Pacers President of Basketball Operations Larry Bird told the team's website (nba.com/pacers).
"We've been looking at everything with our team, from the beginning of the season and now at the halfway mark, and I think at this time a change is necessary."
(Writing by Jahmal Corner in Los Angeles; Editing by Steve Ginsburg)