The 56-year-old agreed a two-year contract after ending an initial short-term deal that took him to the end of the season in 2014.
After a dismal run, the club have opted to make a managerial change as they linger close to relegation.
A statement from Chester read: "We are sure that all our supporters and followers will appreciate that as a fan-owned club this has not been an easy decision for us to make. However, given the recent, extended run of poor form and results we believe this to be in the club's best interests given our current situation.
"The board have asked first-team coach Jon McCarthy to take the remaining four games alongside our captain Ian Sharps given their knowledge of our players. Naturally, as a club we thank Steve for his contribution over the last two years and wish him well for the future.
"We will announce arrangements for the appointment of Steve's replacement in due course."
Chester are currently four points above the relegation zone with as many games left to play.