Running backs coach Eric Studesville will serve as interim coach for the final month, succeeding McDaniels, 34, whose hiring by team owner Pat Bowlen in January 2009 is now viewed by some as a mistake.
"My decision to relieve Josh McDaniels as head coach was not taken lightly. I will always be appreciative of his passion, enthusiasm and hard work, and I thank him for his efforts," Bowlen said in a statement after firing McDaniels with two years left on his contract.
"In the end, I was not satisfied with the results and the direction this team was headed. The decision to make a change was extremely difficult but one that needed to be made for this organization and our fans," Bowlen added. "Everyone, myself included, is accountable for our disappointing season and is now responsible for restoring the culture of winning that has been established by this franchise. Our entire organization is completely focused on returning to the level of prosperity that our fans expect and deserve from the Denver Broncos."
Players didn't know of McDaniels' firing when they left team headquarters after a conditioning run ended at 3 p.m. MT. Shortly after that, McDaniels met with Bowlen and was fired.
"I am very grateful to Pat Bowlen and the Broncos' organization for giving me the opportunity to be the head coach of such a proud franchise. I would like to thank all of the people who helped us over the last two years. I am especially appreciative of the efforts of every player, coach and member of the personnel department who worked so hard every day. I wish Pat Bowlen and the Broncos' organization nothing but the best in the future."
At his weekly news conference four hours earlier, McDaniels reiterated that he wasn't focused on his job being in jeopardy.
"I'm not worried about that. I'm going to coach as hard as I can because that is my job and that's somebody else's decision," McDaniels said.
Studesville and chief operating officer Joe Ellis will meet with the media Tuesday. There was no word on whether McDaniels would hold a farewell news conference.
McDaniels becomes the third coach fired during the season, all in the past month. The Dallas Cowboys fired Wade Phillips on Nov. 8 and promoted offensive coordinator Jason Garrett to interim coach. Two weeks later, the Minnesota Vikings fired Brad Childress and promoted defensive coordinator Leslie Frazier to replace him.
The two new coaches have a combined 5-1 record since taking over, and the Broncos (3-9) likely are hoping Studesville can inject some life into the team to close out this lost season.
"I am very appreciative of the trust that Mr. Bowlen and the entire Denver Broncos organization have shown in me," Studesville said in a statement. "Although the circumstances that this opportunity resulted from are unfortunate, I am excited to lead this football team. We have a great group of players and coaches who are committed to finishing the season on a promising note and making our fans proud of this team."
Studesville, 43, was in his first season in Denver after coaching the running backs in Buffalo from 2004 to 2009 following a three-year stint (2001-03) in that capacity with the New York Giants. He began his NFL coaching career in 1997 with the Chicago Bears after working six years at the collegiate level.
The players learned of McDaniels' firing via Twitter, where the Broncos announced it, and text messages.
"Guys are trying to figure out if it's true, if it's not true, what's going on," wide receiver Brandon Lloyd said on his weekly radio show on Sports Radio 104.3 The Fan in Denver. "The second thing we started thinking about is now who can be the coach?"
Others were melancholy.
"It's tough. He's not out there playing," wide receiver Eddie Royal said. "The guys in the locker room have got to feel somewhat responsible. We didn't play well enough to win these games. We haven't had a good year. We haven't played the way we should have. Our fans are upset, and I can understand that. We've got a lot better football team than we've shown this year."
Although the Broncos are mired in their worst stretch since 1971-72, the timing of McDaniels' firing caught everyone off guard.
"I didn't think it was going to happen," Lloyd said. "Come the offseason, yeah, anything can happen. They shuffle players, shuffle coaches. At this point in the season, I did not see that coming."
McDaniels had nearly $7 million left on his contract, and Bowlen is still on the hook for millions more he owes Mike Shanahan, whom he fired last year. That means Bowlen will be paying three head coaches next season unless the organization decides to withhold McDaniels' salaries for 2011 and '12 based on a violation of his deal, such as a morals clause.
After winning his first six games his rookie season, McDaniels lost 17 of his last 22 in his first NFL head coaching job.
He had plenty of off-the-field issues, too, including linebacker D.J. Williams' drunken-driving charge that caused him to be stripped of his captaincy.
Before he was fired Monday, McDaniels said he was reticent to turn to raw rookie quarterback Tim Tebow although the Broncos had been eliminated from contention with a 10-6 loss at Kansas City, their seventh loss in eight games.
McDaniels made a series of personnel decisions that backfired, notably trading away Peyton Hillis, who has one of the league's top running backs in Cleveland. He also let go of center Casey Wiegmann, who's anchoring the league's top rushing attack in Kansas City.
After beefing up both lines in the offseason, the Broncos rank 29th in the league in rushing offense and next-to-last in run defense.
His biggest blunder might have been the hiring of videographer Steve Scarnecchia, who violated league rules by videotaping a San Francisco 49ers practice Oct. 30 in London. McDaniels was fined $50,000 by the NFL for failing to report the transgression.
A week ago, Bowlen issued a statement that said McDaniels would be evaluated at season's end just an hour after telling AOL FanHouse: "I'm not interested in making a coaching change."
Although the Broncos haven't been to the playoffs since 2006, Bowlen has never in his 27 years as owner had a team dealing with the double-whammy of front-office and on-field issues like he does now.
The franchise was busted for salary-cap violations during its Super Bowl years in the late 1990s, but although there was some outrage around the league, there were no calls for Shanahan's ouster or fans voicing their discontent by bolting the stadium early or leaving seats empty.
With thousands of empty seats at their last home game, the Broncos didn't announce actual attendance but only paid attendance, which at 72,736 was the lowest since Invesco Field opened a decade ago. By the time the Broncos' fourth-quarter rally fell one drive short in a 36-33 loss to St. Louis, the stadium was mostly empty.
The Associated Press contributed to this report.