McDonald was a former coach at Bolton as Sam Allardyce's right-hand man, and took over from Paul Simpson at Carlisle at the start of last season.
Simpson left to take over at Preston and guided the Blues to eighth in their first season back in Coca-Cola League One.
United drew their first game of the new season on Saturday 1-1 at Walsall, but a statement on the club website read: "The board of Carlisle United football club regret to say that they have lost confidence with Neil McDonald and are terminating his contract forthwith.
"They thank him for his hard work at the club and wish him all the best for his future career."
McDonald admitted his amazement after being dismissed from his job at Brunton Park.
The 41-year-old said: "This is obviously a major surprise to me.
"I am absolutely amazed this has happened so early in the season but I am not prepared to say anything more at this point."
Sam thought long and hard about bringing McDonald to Newcastle when he was first appointed manager, but McDonald decided to stay as manager at Carlisle. That obviously changes now he is free to go wherever he pleases.