The 74-year-old returned for his second spell in charge of Uruguay in 2006, having also been in the role between 1988 and 1990, after La Celeste's failure to reach the FIFA World Cup that year.
He led it to fourth place at the 2010 FIFA World Cup and presided over success in the 2011 Copa America.
However, after losing its past four games in FIFA World Cup 2022 qualifying, including a 3-0 defeat in Bolivia on Wednesday (AEDT), Tabarez has been dismissed with Uruguay sitting in seventh place with four wins from its 14 games (D4 L6).
With four games remaining, it is just one point off Colombia in the fourth and final automatic qualification spot, but the Uruguayan Football Association (AUF) has taken the decision to act now.
A statement released by the AUF on Saturday (AEDT) read: "[This is] a difficult decision because of present circumstances, in a commitment to the future and the achievement of the results we all want.
"We express our respect and acknowledgment to [Tabarez's] professionalism and dedication for such a long process."
Tabarez boasts the records for most games (74, including play-offs) and most wins (31) as head coach in the history of CONMEBOL FIFA World Cup qualifying.
During his first stint in charge of the national team, Tabarez took Uruguay to the 1990 FIFA World Cup, where it was eliminated in the Round of 16 by host Italy.
After his re-appointment in 2006, the former Boca Juniors and AC Milan boss took his nation to a further three FIFA World Cups (2010, 2014 and 2018).