Price was unable to defuse the controversy surrounding his off-the-field behavior, which included a visit to a topless bar and unusual charges to a hotel bill.
University President Robert Witt announced his decision after a meeting with the school's Board of Trustees and after a public forum, during which which Alabama players asked that their coach be retained.
"This is a sad day for a good man, a sad day for some wonderful football players," Witt said. "It is a sad day for us."
Price pleaded his case with Witt, but Alabama instead will begin the search for its third coach in four years.
"I asked president Witt for a second chance and he declined," Price said. "Whatever happened to a second chance in life? You don't have to go far to ask my players about second chances. I wanted to make something positive about this negative."
Price came under intense scrutiny from alumni and university officials after he allegedly spent time at a topless club in Pensacola, Fla. on April 16 while in town for a pro-am charity golf tournament.
Various reports claim Price was present and that the next morning a woman in Price's hotel room ordered more than $1,000 in food and drinks and charged it to his bill. Those reports alleged the woman ordered one of every item on the menu and asked that it be placed in boxes so she could take them with her.
The Tuscaloosa News reported that Alabama's probe into Price's behavior expanded to include other incidents in Tuscaloosa, including the possible purchase of alcohol for university students.
Price apologized for his behavior but claimed he never was given a chance to state his case before the Board of Trustees.
"This was an opportunity for the university to stand up and stand behind someone they believed in and help him be a better person," Price said. "I don't know what kind of world it would be if you make one mistake and you're done. This university is about real people and changing people's lives by standing by them in time of adversity. But not this time."
Price coached the team during spring practice and apparently made a favorable impression as many players argued on his behalf.
"We expressed our views and it seemed like our opinions weren't taken into consideration," tackle Wesley Britt said. "We're going to have to live with this."
Price stepped down last December after 14 years as football coach at Washington State, a school he turned into a national title contender. At Alabama, he agreed to a seven-year contract worth $10 million, but various reports claim the contract was never signed.
Alabama greats such as Joe Namath were present four months ago when Price was introduced and the storied program seemed on the verge of putting a succession of negative news events in the past.
But all that changed with Saturday's announcement.
Price went out of his way to praise his players but grew increasingly critical of the administration.
"I think President Witt is making a mistake -- not breaking the law, but he's making an error in judgment," Price said. "If someone makes an error in judgment, is this what happens to him?"
Price replaced Dennis Franchione, who left abruptly to become coach at Texas A&M.
The 57-year-old Price has no ties to Alabama and took over a program that is on NCAA probation. The Crimson Tide went 10-3 last season but were under a bowl ban that stretches to 2003 as part of NCAA sanctions that include scholarship reductions.
Price was 83-78 at Washington State and guided the Cougars to a share of the Pac-10 Conference championship last season.