The Magpies have won just one of their last eight matches and Saturday's 4-1 defeat by MK Dons left them outside the League One relegation zone on goal difference alone.
Assistant manager Greg Abbott has also departed the club.
County CEO Aileen Trew said: "This is without doubt one of the hardest decisions that we have had to make as a board because we know how much this club means to Shaun and Greg and we know how much hard work they had both put in during their time here.
"However, we have to make the decisions that we feel are in the best interests of the club and our perilous position in the table meant that we felt we needed to make a change.
"I have nothing but positive things to say about Shaun and Greg and the way that they conducted themselves during their time here at Notts County.
"It is with a heavy heart that we say goodbye to them, but with a hope that this difficult decision will be the catalyst for a turn around in fortunes, starting this weekend at home to Scunthorpe United."
Former Crystal Palace and QPR midfielder Derry, 37, joined County in November 2013 in what was his first managerial role and saved them from relegation last season.
The club have yet to announce who will be in charge against Scunthorpe.
Source : PA