"Sheikh Mansour and the board felt that there was no evidence that the situation would fundamentally change.
"This is a particularly difficult announcement given the personal investment over the past 15 months on all sides and we would like to put on record our respect for and thanks to Mark Hughes and we wish him the best in his future career."
Mark Bowen, Eddie Niedzwiecki, Kevin Hitchcock and Glyn Hodges have also left the club and further appointments will be announced in due course.
City currently lie sixth in the Premier League, having lost only twice in the league all season, and are through to the semi-finals of the Carling Cup.
They beat league leaders Chelsea a fortnight ago, ending a run of seven successive draws in the top flight, but suffered a crushing 3-0 defeat at Tottenham in midweek.
Now, despite a thrilling victory over Sunderland, Hughes finds himself out of work.
Roberto Mancini 'probably' will not be better than Mark Hughes - Hansen
The 46-year-old Welshman enjoyed a glittering playing career as a striker with Manchester United, Barcelona and Chelsea before moving into coaching by taking charge of Wales and narrowly missing out on qualification for the Euro 2004 finals.
He furthered his reputation at Blackburn Rovers, where in his four years at Ewood Park they regularly challenged for European qualification and reached three FA Cup semi-finals.
After moving to Eastlands, City won 36 and lost 25 of 77 games under Hughes. Of their 16 draws, eight of them came in their last 11 Premier League outings.
They also spent close to £200m on players during his 18-month reign, including a record-breaking British transfer fee of £32.4m on Robinho.
City also paid out heavily for Gareth Barry (£12m), Roque Santa Cruz (£16m), Tevez (£25m), Adebayor (£25m), Kolo Toure (£15m) and Lescott (£22m).
What is absolutely clear is that Roberto believes in Manchester City's potential to achieve at the highest level and importantly in his own ability to make this happen
Man City statement
Their spending would have been far greater had they succeeded with bids for England and Chelsea defender John Terry, Cameroon striker Samuel Eto'o and Brazilian playmaker Kaka.
Mancini, who watched Man City's victory from the stands at Eastlands, takes over immediately after agreeing a three-and-a-half-year contract
The 45-year-old won 36 caps for Italy and spent the majority of his playing career at Sampdoria before a brief stint with Leicester City in 2001 just before he retired.
He has managed Fiorentina and Inter Milan, where he won three successive Italian League titles and two Italian Cups, before being dismissed in May 2008.
Since then, he has regularly been linked with managerial vacancies in England.
Commenting on the appointment of Mancini, chairman Khaldoon Al Mubarak said: "Roberto is a hugely experienced manager with a proven track record of winning trophies and championships. His experience and track record speak for themselves.
"What is absolutely clear is that Roberto believes in Manchester City's potential to achieve at the highest level and importantly in his own ability to make this happen.
"My hope is that our incredible fans will join us in welcoming Roberto to the football club."
Mancini's first game in charge will be against Stoke on Boxing Day.
Kidd, whose playing career involved a spell at Manchester City in the 1970s, moves up from his role with the club's academy.
The former England international was assistant manager to Sir Alex Ferguson at Manchester United and also had an unsuccessful stint as Blackburn manager in the late 1990s.
Steve Bruce, the Sunderland manager, said in his post-match interview that it would be "disappointing" if Hughes, a former team-mate of his at Manchester United, did part company with City.
Mancini has frequently been linked with a move to English football
"You can't build a football club in 18 months and one transfer window. You need a bit of time," said Bruce.
"I don't think anyone is surprised by these things anymore. It is ridiculous. You are not going to encourage any young person to try and take this up. What is the point?
"What are the stats? Managers last about 18 months in the Championship. It is longer in the Premier League, but that is because of the amount of time Sir Alex Ferguson, Arsene Wenger and David Moyes have been in their jobs.
"I am disappointed for Mark Hughes. Really disappointed."
Arsene Wenger also said he was "sad" to see Hughes leave City, adding: "We all believe in patience on the technical side but on the other side it's not always the same."
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