His exit followed a 3-0 home loss to Queens Park Rangers, managed by former Blades boss Neil Warnock.
The Blades opened the Championship season with a 1-1 draw at Cardiff City last Saturday but were beaten by Hartlepool United in the first round of the Carling Cup in midweek.
It was the abomination at home to the R's - who scored all three goals inside the opening 23 minutes - that cost Blackwell, 51, his job.
"Kevin Blackwell has worked tremendously hard over the last two and a half years and his record in terms of results is equal to, if not better than, most previous managers at Bramall Lane," read a club statement.
"He will always have a warm welcome at Sheffield United. It is time for us to move on because our ambition remains the same in challenging for promotion, hence this decision to look for a new manager to carry on the work Kevin has been doing."
Blackwell had been in charge since February 2008, leading the side to the Championship play-off final where they were defeated by Burnley. The Blades finished eighth last season.
Steve Coppell had walked out on Bristol City on Thursday, saying he could not motivate himself to work in management any more.
Keith Millen, who replaced Coppell at the Robins, marked his first game with a point at Doncaster Rovers.
"It's been a difficult week for all of us and you are never quite sure where the lads are mentally until they cross the white line," he said.
"But they showed they are with me with the commitment and work-rate they put into the game. They did everything I asked of them. It's a daunting task here but I'll take it day by day and I'm looking forward to the challenge.""