Despite leading the club to consecutive promotions, the 37-year-old was relieved of his duties after a meeting with director of football Barry Fry and chief executive officer Bob Symms.
The son of Manchester United manager Sir Alex Ferguson had forged himself a strong reputation after leading the club up from League Two, but Newcastle sent them bottom of the table.
Ferguson signed a new four-year contract in the summer after being linked with moves to Reading, West Brom and QPR.
There was a certain degree of friction between Posh and the Magpies as Steve Harper accused Peterborough's players of "milking" their Carling Cup win over a Newcastle United side packed with teenagers in September.
Tim Krul played in goal that night.
Steve Harper: "I wasn't at Peterborough, but I'm told that their players were milking it against a lot of our young lads, so we were looking forward to them coming up.