The Hammers are 14th in the Premier League table, seven points above the relegation zone, after just six wins in 20 league matches during the Spaniard's tenure.
A 4-1 hammering at champions Manchester City on Saturday was the final straw for club chiefs.
Lopetegui, 58, took training as usual on Tuesday and reported for work on Wednesday to be officially told his spell in charge was over.
"West Ham United can confirm that head coach Julen Lopetegui has today (Wednesday) left the club," the Hammers said in a statement.
"The first half of the 2024/25 season has not aligned with the club's ambitions and the club has therefore taken action in line with its objectives."
West Ham were among the biggest spenders in the Premier League in the summer transfer window, splashing out around £125 million ($155 million) on players including Max Kilman, Crysencio Summerville and Niclas Fullkrug.
But Lopetegui won just one of his first six league games and oversaw several heavy defeats, including a 5-2 loss to Arsenal and a 5-0 drubbing by Liverpool, both at home.
The former Real Madrid and Spain boss was appointed in May last year to replace David Moyes, who left at the end of last season after a second spell at the London club.
Under the Scot, West Ham qualified for European competition for three consecutive seasons, winning the Europa Conference League in 2023 to secure the club's first major trophy in 43 years.
Lopetegui, who had previously managed Wolves in the Premier League, said at the time of his appointment he had other opportunities but he was "very happy that West Ham chose me because I chose West Ham too".
In their search for a replacement for Lopetegui, the club reportedly spoke to former AC Milan boss Paulo Fonseca and ex-Paris Saint-Germain manager Christophe Galtier.
But Potter is the hot favourite to replace Lopetegui, with the club understood to have held talks with the former Chelsea and Brighton manager about becoming their new manager, initially on a short-term deal.
Potter, 49, has been out of management since he was sacked by Chelsea in April 2023, just seven months into a five-year contract. He won a mere 12 of his 31 matches in charge.
The Englishman began his managerial career at Swedish club Ostersund and had successful spells with Swansea and Brighton before taking over at Stamford Bridge.
West Ham face Aston Villa in the FA Cup third round on Friday prior to Premier League matches against Fulham and Crystal Palace.
Lopetegui is the fifth Premier League manager to lose his job this season, following the sackings of Erik ten Hag (Manchester United), Steve Cooper (Leicester), Gary O'Neil (Wolves) and Russell Martin (Southampton).
