The announcement comes following Saturday's 1-0 home defeat to Bolton Wanderers, which left the St Andrew's club – who survived relegation with a last-gasp 2-2 draw at Bolton on the final day of last campaign – in 21st place with 11 points from 12 games.
And Clark has paid the price for Birmingham's continued failings, with his tenure brought to an end after over two years at the helm.
A statement on Birmingham's official website read: "Birmingham City football club has parted company with Lee Clark and Steve Watson with immediate effect.
"The search for a successor has already begun and the board will look to make an appointment in the very near future
"In the meantime, first-team coach Richard Beale and chief scout Malcolm Crosby have been placed in caretaker charge.
"The club wishes to place on record its sincere thanks to Lee Clark and Steve Watson for their combined efforts over a period stretching back to June 2012."
Birmingham begin life without Clark on Tuesday with a trip to Ewood Park to take on Blackburn Rovers.