Washington is next to last in the Southeast Division with a 32-46 record and has been eliminated from playoff contention.
“We did not meet our stated goals of qualifying for the playoffs this season and, despite playing with injuries to several key players, we have a culture of accountability and a responsibility of managing to positive outcomes,” team owner Ted Leonsis said in a news release.
“I wish to thank Ernie for his service to the Washington Wizards. He and his family have been great leaders in our community and have worked tirelessly to make us a top NBA franchise.”
Tommy Sheppard, senior vice president of basketball operations, will handle basketball matters, reporting to Leonsis.
Point guard John Wall and center Dwight Howard missed most of the season, and forward Markieff Morris also was injured before getting traded.
Grunfeld held his job for 16 seasons, during which time the Wizards compiled a 568-724 record and made eight trips to the playoffs.
Washington never made it past the second round of the playoffs and never won at least 50 games in a season, despite having All-Stars such as Wall, Bradley Beal, Gilbert Arenas, Caron Butler and Antawn Jamison.
Wall is expected to be sidelined for much, if not all, of next season, too. Beal is the only other elite player who is under contract for next season. Otherwise, the cupboard is rather bare, and because of the large contracts Grunfeld gave Wall and Beal — not to mention backup center Ian Mahinmi, who rarely plays — there is not a lot of money available to bring top-level free agents to the Wizards.
The team also doesn’t have a second-round draft pick in this year’s NBA draft because Grunfeld traded it away.
Grunfeld previously was general manager of the New York Knicks and Milwaukee Bucks.
He played nine seasons in the NBA with three teams.
The Associated Press contributed to this report.