Assistant coach Mike Woodson will take over as the interim coach, he said.
Dolan told reporters D'Antoni "felt that it was best for the organization if he were not to continue [as head coach]. He did offer to stay, but after a long discussion we decided it was best for the team if he did not continue in his role."
The move came as the Knicks stumbled to their sixth straight loss Monday in a 104-99 defeat at the hands of the NBA-best Chicago Bulls. The squad fell to 18-24 with the setback -- good for a tie with the Milwaukee Bucks for an eighth and final Eastern Conference playoff spot.
"Mike is a great coach and even better guy," Knicks interim General Manager Glen Grunwald added. "But now we have to move forward. We're going to do everything we can to get this team back on track."
D'Antoni compiled a 121-167 record in three-plus seasons in New York.
NBA.com reported D'Antoni's departure was hastened by a disagreement with Dolan over the possibility of trading superstar forward Carmelo Anthony.
Citing an unnamed source, the Web site said D'Antoni wanted to swap Anthony to the New Jersey Nets for Deron Williams -- a proposed move Dolan "categorically declined."