Roy Keane, O'Neill's assistant, also left the club on Sunday which was seen as a significant blow to the manager's authority.
"The club would like to thank Martin for all his efforts during his time at the City Ground and wish him well for the future", read a club statement.
The 67-year-old - who made 371 appearances for Forest as a player, winning two European Cups - returned to the City Ground as boss in January. In 19 games under O'Neill, the team won eight games, lost eight games and recorded three draws.
The report also states that Forest have lined up a replacement in Sabri Lamouchi, a former France global who has managed the Ivory Coast, Qatari-based side El-Jaish and most recently Ligue 1 side Stade Rennais.
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Forest will be hoping their next boss can finally bring an end to their 16-year spell outside the top flight and book their return to the Premier League for the first time since 2004.
Lamouchi is the 13th manager Nottingham Forest have appointed in the last eight years.
He led Ivory Coast during the 2014 World Cup and won the Qatari Cup with El Jaish.
And just 20 minuites later a new statement was issued confirming Lamouchi's arrival at the club.