Davies' second spell in charge of the Reds came to an end after a dismal run of form and a breakdown in his relationship with the club's owner and chairman, Fawaz Al Hasawi.
The heavy loss at the iPro Stadium saw Forest's run without a win reach eight matches - a streak which has seen the Reds go out of the FA Cup to League One side Sheffield United and drop out of the Championship play-off places.
A statement on Forest's official website said: ''Nottingham Forest Football Club have confirmed the termination of manager Billy Davies' employment.
"The club thank Mr Davies for his efforts during his second spell as manager since his re-appointment in February 2013 and wish him well for the future.
"Nottingham Forest will make a further announcement in due course."
Reports on Monday morning named Neil Warnock as the frontrunner to replace Davies on a short-term deal until the end of the season.
The 65-year-old, who has been out of management since leaving Leeds in April 2013, would reportedly bring in Keith Curle and Ronnie Jepson as his assistants.
Davies, who on his return to the club in February 2013 was handed a contract until the summer of 2017, steered Forest to the Championship play-offs twice during his first spell in charge, before his relationship with then-owner Nigel Doughty broke down and led to his departure.
On his return to the City Ground Davies transformed Forest from mid-table also rans to Championship play-off contenders in the remaining months of the season. But the Reds missed out on a top-six spot after a final-day home defeat to Leicester.
Before that game Davies took the unusual step of conducting his post-match press conference.
It was a sign of what was to come in a series of strange goings-on at the club.
This season has seen the decision to bar most of the media - apart from the official website and a regional TV station - and the filming of journalists at press conferences.
This prompted another Championship club's chief executive as being quoted in the Daily Telegraph referring to Forest as "the Midlands version of North Korea".
Long-serving staff were sacked without explanation while Jim Price, Davies' cousin and his agent, joined Forest's ranks in a senior post, despite failing the relevant fit-and-proper-person tests because he is currently suspended from his profession as a solicitor.
There have also been stories of rows with photographers at games, namely at Millwall, Brighton and Barnsley.
Through it all Davies had received the backing of Fawaz Al Hasawi but a recent disagreement over transfers combined with Saturday's humiliating loss at Derby seems to have been the final straw for the chairman and owner.