Holloway was initially given full backing by the club's chairman Milan Mandaric, but he has now left the club.
"I could not fault either his commitment or effort to the cause but the last few weeks have been the most disappointing during my tenure within the game," said Mandaric.
"We both felt it would be in the best interests of Leicester City and its long-term future if we amicably parted company. This has been a very difficult decision for all parties but, we have agreed that the time is now right
"My energies will now be fully focused on getting the right man, firstly to stop the decline we have suffered in the last few years, and secondly, to take us forward in the future with that level of stability which we all crave."
Holloway quit Plymouth Argyle to take charge at the Walkers Stadium in November, but won just nine of 32 games as they plummeted down the Championship table.