Lead assistant Randy Wittman was elevated to interim head coach.
"We felt the team had become unresponsive and we will look to Randy to provide a different voice and a change in philosophy moving forward," Wizards President Ernie Grunfeld said in a statement. "We have been transparent in how we would evaluate our team this season and we were disappointed in the lack of development of our players at this point in our rebuilding plan."
Saunders compiled a record of 51-130 during his two-plus seasons with the Wizards, the team said.
"We have struggled as a team at times this season, but we have also seen a great deal of potential from our young players and glimpses of what we can accomplish together as a team," Wittman, the new head coach said. "The coaching staff will look to build on that by utilizing the length, athleticism and versatility of our roster to improve our defense and create more opportunities in the open court."
This is Wittman's third stint as a head coach after leading both the Minnesota Timberwolves and Cleveland Cavaliers. He has compiled a 100-207 career record as head coach and has served as the Wizards' lead assistant since the 2009-2010 season.