USC (7-10) has lost nine of its last 13 games.
O'Neill, 55, was in his fourth season as coach of the Trojans.
Assistant coach Bob Cantu will run the team while a search is conducted for O'Neill's replacement, Athletic Director Pat Haden said.
"It was hard for me to evaluate [O'Neill] as a head coach until this year when he had enough players and veterans to compete," Haden said. "As the season progressed, it became evident to me that we needed new leadership in our men's basketball program."
The Trojans were 19-15 in 2010-11 and 6-26 last season.
"I enjoyed my four years at USC. It is a special place," O'Neill said.