Megson only took over at the Walkers Stadium on September 13, and the Foxes have won just three of his nine games in charge - and only one of those victories came in the league - a 2-0 win at Sheffield Wednesday.
The defeat to the Blades - courtesy of a Danny Webber goal - was only his second at the helm, and the Foxes have found the net just five times in the seven Championship matches under Megson.
Mandaric continued: 'Naturally I am very disappointed. My objectives were to stand firm in the face of mounting interest from Bolton and intense media speculation over Gary's future but in the end these completely undermined my firm determination to retain his services.
'Needless to say our objectives to win promotion this season remain the same. The search for a new manager begins in earnest.
'In the meantime, assistant manager Frank Burrows and Gerry Taggart will assume temporary control of first-team affairs until we are in a position to announce a significant appointment.'
If Megson does leave the Foxes, it will leave Mandaric searching for the fourth manager of 2007, with Rob Kelly, Nigel Worthington and Martin Allen having already left the club since the former Portsmouth owner took over the club.
