Gattuso had been appointed in the summer in the hope he could lead the Sicilian side back to Serie A following their relegation to the second division last season.
However under Gattuso, making his first serious foray into full-time coaching, Palermo had collected just seven points from six games, their latest reverse coming on Tuesday with a 2-1 defeat at Bari.
Palermo club president and owner Maurizio Zamparini, who is known for frequently changing coaches when faced with unsatisfactory results, said: "It is with deep regret that we have had to release Gennaro Gattuso from his position as coach of the squad.
"His first serious coaching position was perhaps too big a responsibility at a club as demanding as Palermo. The results have proved us wrong. I have now given Giuseppe Iachini the job of leading us back to Serie A."