The former Bulgaria international midfielder only took charge in late March, following the sacking of Marco Kurz, but he could not stop FCK sliding back to the second tier.
He had signed a contract until the end of next season and the club will take their time to find a successor.
"We have analysed the past few weeks intensively and have come to the conclusion that we will need to start afresh next season," CEO Stefan Kunz said, in reference to the club losing seven of their last eight matches.
"The head coach is the key person for the development of the club’s sporting strategy," he added.
Balakov’s assistant Ilia Gruev was also sacked.
Several coaches have been linked with the vacancy, mostly unemployed former FCK players such as ex-Sturm Graz boss Franco Foda and Ciriaco Sforza, recently fired by Grasshoppers Zurich.
Roger Schmidt of FC Paderborn has also been touted as a replacement after impressing with the second-tier minnows, who finished fifth in 2. Bundesliga on a limited budget.