It follows a newspaper investigation claiming he offered advice on how to "get around" rules on player transfers. Allardyce, 61, is also alleged to have used his role to negotiate a deal worth ?400,000 ($5,21,060) to represent a Far East firm.
An FA statement on Tuesday said Allardyce's conduct "was inappropriate" and Gareth Southgate, currently the manager of the England U-21 team, will take temporary charge.
"Allardyce's conduct, as reported today (Tuesday), was inappropriate of the England manager. He accepts he made a significant error of judgement and has apologised. However, due to the serious nature of his actions, the FA and Allardyce have mutually agreed to terminate his contract with immediate effect," the FA said in the statement.
"This is not a decision that was taken lightly but the FA's priority is to protect the wider interests of the game and maintain the highest standards of conduct in football. The manager of the England men's senior team is a position which must demonstrate strong leadership and show respect for the integrity of the game at all times," the statement added.
"Gareth Southgate will take charge of the men's senior team for the next four matches against Malta, Slovenia, Scotland and Spain whilst the FA begins its search for the new England manager."
Allardyce succeeded Roy Hodgson in July following England's disastrous performance at Euro 2016 in France where they crashed out following a defeat to Iceland in the pre-quarterfinals. Following his dismissal, Allardyce has become the shortest-serving full-time manager of the ENgland team.
The Daily Telegraph had reported that Allardyce had a meeting with undercover reporters posing as businessmen before he took charge of his first England training session.
During the meeting, which was recorded on camera, it is alleged Allardyce said it was "not a problem" to bypass rules on third-party player ownership and claimed he knew of agents who were "doing it all the time".
It was further alleged that a ?400,000 deal was struck for him to represent the company to Far East investors and to be a keynote speaker at events.
In the meeting, Allardyce also referred to Hodgson as "Woy", making fun of his predecessor's manner of speaking, and criticised Gary Neville, one of Hodgson's assistants.
Allardyce met FA chairman Greg Clarke and chief executive Martin Glenn on Tuesday to offer what he called a "sincere and wholehearted apology for my actions".
"Further to recent events, The FA and I have mutually agreed to part company. It was a great honour for me to be appointed back in July and I am deeply disappointed at this outcome," Allardyce said in a statement following his dismissal.
"This afternoon, I met with Greg Clarke and Martin Glenn and offered a sincere and wholehearted apology for my actions. Although it was made clear during the recorded conversations that any proposed arrangements would need The FA's full approval, I recognise I made some comments which have caused embarrassment," he added.
"As part of today's meeting, I was asked to clarify what I said and the context in which the conversations took place. I have co-operated fully in this regard. I also regret my comments with regard to other individuals."
Allardyce, who has long experience of managing clubs in the English Premier League (EPL) including Newcastle United, West Ham United and Sunderland, later told the media that he was a victim of entrapment.
"On reflection it was a silly thing to do. I was trying to help someone out I knew for 30 years and unfortunately it was an error in judgement on my behalf. Entrapment has won on this occasion and I have to accept that," he was quoted as saying by the Guardian.
"The agreement was done very amicably, I apologised to the FA and to all concerned for the unfortunate situation that I put myself in. I have confidentially agreement, I can't answer any more questions just now, I'm going on holiday to reflect. I would like to wish Gareth (Southgate) and all the rest of the England lads the very best."
Asked whether the England manager's post would be his last job in football, Allardyce replied, "Who knows, we'll wait and see."
