McDermott, 51, led the club to promotion last season, but with four successive Premier League defeats have left them four points adrift of safety.
A Reading statement said: “The search for a successor starts immediately. It is hoped a new manager will be in place as soon as possible.”
Academy head Eamonn Dolan is in charge of the first team in the interim.
The Royals also confirmed first-team coach Nigel Gibbs had also left the club he joined in 2006.
McDermott joined Reading in 2000 as a scout/coach working under Alan Pardew and Steve Coppell.
He was named caretaker manager in 2009 following the sacking of Brendan Rodgers, before being appointed permanent manager.
McDermott just missed out on promotion to the Premier League in his first season in charge of Reading, reaching the play-off final.
The good news for reading fans is that there are 2 exceptional Italian managers out of work at the moment Roberto Di Matteo and Paulo Di Canio, im sure the bookies will be making them both hot favourites, but lets hear from you reading fans….. who do you want to take the vacant hot seat and do you think you have the team to avoid relegation