Goals from Perry Ng and a stunning solo effort from Rubin Colwill condemned the Robins to defeat in the Severnside derby, leaving them 15th in the Championship table with 18 points from their 14 matches.
Bristol City have now lost five of their last seven outings, prompting the board to sack Pearson after more than two-and-a-half years in charge.
The 60-year-old had been the second-longest serving manager in the Championship, having initially taken the reins in February 2021.
"This was a difficult decision to make as we recognise and appreciate how much Nigel has done for the club over the past two-and-a-half years on and off the pitch," read a statement from Bristol City chairman Jon Lansdown.
"Nigel is highly respected by the staff and players and has been very supportive of the Academy structure and our Women's team.
"We all wanted Nigel to achieve our ambition to be promoted but, with our recent results, feel that now is the time to make a change to give the club the best possible chance of success."
First-team coach Jason Euell and head of medical performance Dave Rennie will also leave the club as part of the shake-up, while Curtis Fleming will take the reins on an interim basis, assisted by Ali Hines and Kalifa Cisse.
Pearson, whose contract at Ashton Gate was due to expire at the end of this season, oversaw 131 matches as Bristol City boss, winning 42 of those and losing 57.
The former Leicester City and Watford boss becomes the second Championship manager sacked this weekend - after Gareth Ainsworth at Queens Park Rangers - and the sixth overall this season.
Bristol City are next in action at home to rock-bottom Sheffield Wednesday on Saturday.