Dooley, in his third season with the team, was let go following the Volunteers' 41-18 loss to Vanderbilt Saturday. Tennessee fell to 4-7 overall and 0-7 in the Southeastern Conference.
The Vols went 15-21 and failed to post a winning season during Dooley's tenure.
"Derek and I met early this morning, and I informed him that I believed a change in leadership, despite the positive contributions he has made to the overall health of the program, was in the best long-term interests of Tennessee football," Athletic Director Dave Hart said in a statement.
Dooley is the son of Georgia coaching legend Vince Dooley.
He took over at Tennessee in 2009 following the departure of Lane Kiffin.
"I am sorry we could not generate enough wins to create hope for a brighter future," he said.
Offensive coordinator Jim Chaney will take over for next week's season finale against Kentucky, which is also 0-7 in the SEC.