The last-placed Dragons had already been on the longest losing streak in club history before Saturday's 30-12 loss to South Sydney made it 11 defeats in a row.
The Dragons settled on Flanagan's departure by "mutual agreement" on Monday morning, less than nine months after tying the 2016 premiership-winning coach to a two-year contract extension.
"This is clearly a significant moment for the club," chief executive Tim Watsford said at Monday's snap press conference in Wollongong.
"We understand the disappointment and frustration our members and our fans feel, and we know that results and performances have not met expectations for this proud club."
Flanagan did not have the chance to begin his new contract, which had been set to start next year.
But Dragons chair Andrew Lancaster felt the club needed to act regardless of the deal, with pressure on Flanagan intensifying after the 32-0 loss to North Queensland in round five.
"As a club, as an employer, there is a duty of care, not just to the club, to its supporters, its fans but a duty of care to our employees," Lancaster said.
"A lot of what has transpired over the last week, the conversations we've had, have been about that."
The Dragons have also parted ways with general manager of football Ben Haran, who had presided over the club's underachieving playing list.
Lancaster insisted neither had been fired, taking exception to a question about moving on from Flanagan, who took over for the 2024 season.
"You say 'moving on'. That's not what we just said. We talked about a mutual agreement," Lancaster said.
"We've been talking to Shane the whole time, this is an organisation, it's a sporting club, we talk to our head coach on a regular basis.
"These conversations, whilst (they) didn't get to an outcome until this morning, these conversations have been taking place."
As recently as the post-match press conference for Saturday night's loss, Flanagan had insisted he remained the right man to coach the Dragons.
The club's board will meet on Tuesday and decide on an interim coach to take charge of the Dragons, who have now fired three full-time coaches since last playing finals in 2018.
Assistant coach and 2010 premiership player Dean Young appears a strong candidate, having long been earmarked as head-coach material.
"Whoever takes control of this club understands that there will be a significant amount of pressure and expectation, and rightly so," Lancaster said.
"Our job is to get to the right solution, ensure that we've got the right person and people in charge of this organisation."
Young took over mid-season after the Dragons fired Paul McGregor in 2020, and held the interim role at North Queensland before Todd Payten was appointed.
Michael Ennis, another of Flanagan's former assistants, is also an option but is untested as an NRL head coach.
Young and his former Dragons teammate Ben Hornby, an assistant at South Sydney, are both considered chances to take on the role full-time next year.
The interim coach's first game will be the Dragons' most important fixture of the regular season, the traditional Anzac Day clash with the Sydney Roosters.
Flanagan leaves with a 35 per cent win rate, having claimed 19 victories from 55 games.
The club will offer support to Flanagan's son Kyle, the team's highly scrutinised halfback who remains contracted until the end of 2027.
"We'll provide every means possible to support Kyle. And as we have been, we'll continue to support Shane," Watsford said.
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