Valencia sacked head coach Ruben Barraza after just two wins in 17 La Liga games this season.
Baraja, who played for the club between 2000 and 2010, returned to the managerial role in February 2023.
In the 2022–23 season he managed to manage Valencia to a ninth-place finish last term, before surviving two points.
However, the 49-year-old departs with the club 19th in La Liga, four points from safety.
“He helped stabilize the team in a difficult situation and last season, he contributed to the implementation of competitive values that brought Valencia closer to the fight for European positions,” the club said.
Valencia said Barajas was “one of the greatest legends” in the club’s history and the decision to sack him was “extremely difficult”.
Baraja won five trophies in 10 seasons as a player at the club, including two league titles and the UEFA Cup.
In his last game as manager, Valencia drew 2-2 with Alaves on Sunday to move to the bottom of the table on goal difference with Real Valladolid.
The former Spain international, who played at the 2002 World Cup, has previously managed Elche, Rayo Vallecano, Sporting Gijon, Tenerife and Zaragoza.
Valencia face reigning champions Real Madrid in their next La Liga match on January 3.
