Wanderers was consigned to a third straight defeat by Perth Glory on Sunday and have still won just once since October.
The club confirmed head coach Babbel's departure on Monday after 20 months in charge.
"It is unfortunate that we have needed to take this course of action because we have a great relationship with Markus," Wanderers chairman Paul Lederer said in a statement.
"However, we firmly believe that we have a great squad and the results are most definitely not reflective of the ability of the players at this club and certainly do not reflect the aspirations of the Western Sydney Wanderers Football Club.
"We have total faith in the group of players here at the Wanderers and look forward to pushing on with renewed vigour towards the finals series."
Wanderers is ninth in the table with Jean Paul de Marigny taking temporary charge as caretaker coach.