After failing to make home advantage tell in Thursday's first-leg 0-0 draw against the Cottagers, Hamburg were drubbed 5-1 at Hoffenheim on Sunday.
"We saw that as things were we would not be able to succeed against Fulham," club chairman Bernd Hoffmann said. Assistant coach Ricardo Moniz will take charge until the end of the season.
"There was no alternative to this," added Hoffmann. "We need to improve the probability of us being successful on Thursday (against Fulham)."
Labbadia took over at the northern German club last summer, enjoying a successful start to the season.
However, Hamburg have won just four of their 15 Bundesliga games since the winter break. Sunday's loss to their mid-table opponents leaves them seventh in the table, five points behind nearest rivals Stuttgart, who hold the last European berth with just two games remaining.
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