Bulgarian Football Union bosses decided to dismiss Penev, who spent three years in charge, after Sunday's 1-1 draw with Malta left the Balkans with just four points from their first four Group H qualifiers — six points adrift of table toppers Croatia and Italy.
BFU president Borislav Mihaylov confirmed that Penev, who represented his country 62 times including at Euro '96 and the 1998 World Cup, had been relieved of his duties in a statement on the union's website.
"I'm sorry I have to part with Luboslav. We played together and I'm angry because he did many good things at the head of the national team," Mihaylov said.
"But now there are no results and my colleagues in the executive committee shared the view that it cannot continue.
"Surely Penev is not the only culprit. A lot of players have failed him, but the coach is the one who should be affected, and this did not happen."
Mihaylov went on to reveal that the BFU will take its time to appoint a new national team boss and that he will be Bulgarian.
"We have time to look for Penev's successor as our next qualifier is not until next March, against Italy in Sofia," he added.
"All I will say is that the next coach will not be a foreigner."
Penev succeeded Lothar Matthaus as Bulgaria coach in 2011 when the German failed to guide them to Euro 2012 in Poland and Ukraine.
Under Penev's guidance, Bulgaria made a bright start to 2014 World Cup qualifying but defeats to Armenia and the Czech Republic in their final two games meant they did not make the finals in Brazil.