The decision was taken at a board meeting on Thursday afternoon, and ends the former defender's 17-month reign in charge at Glanford Park.
He was brought in to replace Ian Baraclough, who was sacked after a 3-0 home loss to Preston, now he has suffered the same fate.
His last match was not Tuesday's 3-2 defeat to the same opposition on his own turf, but Saturday's 3-0 reverse at the hands of MK Dons.
Knill leaves with the Iron in the League One relegation zone, with 10 points from their opening 15 games.
"The last few weeks have become increasingly difficult and eventually we had to make the decision it was time for a change," said Steve Wharton, the Iron chairman.
"Alan is a very capable coach, but we'd lost that desire and confidence which is the manager's job to install.
"Perhaps we did hang on longer than we should have done, but Alan is a nice guy and I wanted him to succeed."
"The difficult decision was made inevitable by the recent long rung of disappointing performances, especially at home," said a statement from Scunthorpe United.
"The club would like to thank Alan for his hard work and wish him well for the future."