Saunders only took charge in January after replacing Norwegian Stale Solbakken who himself had only taken the reigns the previous summer.
Saunders managed to win just five of his 20 games in charge at Molineux as the club suffered back-to-back relegations.
Saunders began his management career with Wrexham in the Blue Square Bet Premier before taking over at Doncaster.
A return to Doncaster could be on the cards, after Brian Flynn decided to move upstairs despite leading the club to promotion to the Championship.
Saunders' playing career included spells with Liverpool and Aston Villa, where he won the FA Cup and League Cup respectively, while he also earned 75 caps for Wales.
"Manager Dean Saunders has been informed by Wolves that his contract is to be terminated, " read a club statement
"The decision has been made following confirmation of Wolves’ relegation to League One. Assistant Manager Brian Carey will also be leaving the club.
"Wolves have now begun a recruitment process, which, in conjunction with the board, will be managed by Head of Football Development & Recruitment Kevin Thelwell.
"The club will now take as long as is necessary to make this crucial appointment and there will be no publicly communicated timescales.
"Wolves would like to thank Dean and Brian for their efforts in what has been a very difficult period for everyone, and wish them both the very best for the future."
- Sports & Recreation
- Dean Saunders
- Stale Solbakken
- Brian Flynn