The 53-year-old was only appointed in September but his reign ended following Saturday’s 2-1 Sky Bet Championship loss – a fifth straight defeat – at Nottingham Forest.
The result left Blues third from bottom in the table, two points from the safety line, and hunting their third permanent manager of the season.
‘This course of action is taken with great regret and sadness,’ a club statement read.
‘Steve has conducted himself professionally on behalf of the Club at all times, his work ethic and honesty are a credit to him and there is a genuine sadness at this decision.
‘However, the Board feel that a change in management at this stage is in the best interests of the Football Club.’
Press Association Sport understands Birmingham’s board will turn to Monk,with the 38-year-old still available since leaving Middlesbrough in December.
He wants to get back into management and Blues, who have kept tabs on the Welshman ever since he left Swansea in 2015, are ready to offer him that chance.
The Championship outfit have also held talks with former Scotland boss Gordon Strachan, despite the 61-year-old being out of club management since 2010.
Cotterill only took charge of Blues last September, penning a two-and-a-half-year deal worth around 450,000-a-year.
But he struggled to turn things around, winning seven of his 27 games.
Further questions over his future were raised on Saturday when there was no Birmingham presence in the Nottingham Forest boardroom.
Press Association Sport understands Birmingham, owned by Chinese firm Trillion Trophy Asia, opted to have a private box for the game at the City Ground.
Cotterill, who said he had positive talks with the club’s owners this week, replaced Harry Redknapp after the former Tottenham boss lasted just 13 games.
Redknapp was drafted in for the final three games of last season – with Cotterill his assistant – and guided Blues to safety, banking a 250,000 survival bonus.
He was given 20million to spend in the summer, breaking the club’s transfer record by signing Jota from Brentford for over 6million, but left after only 10 games of this season.
Coaches Paul Groves, Paul Williams and Kevin Hitchcock along with director of football Jeff Vetere have also left.
Derby's decision to postpone Sunday's home Sky Bet Championship game against Cardiff was made independently, Derbyshire Police have confirmed.
Rochdale have no new injury worries ahead of Tuesday's Sky Bet League One relegation battle with fellow strugglers Fleetwood.