The announcement was made Monday, a day after the Bills closed out another disappointing season with a 28-9 win over the New York Jets.
Buffalo finished 6-10, and Gailey leaves with a 16-32 record. There was no immediate word on the status of general manager Buddy Nix.
In a hopeful season after signing star defensive end Mario Williams to a $100 million contract, the Bills reverted to their ways of the past, failing to make the playoffs for a 13th straight year, the NFL's longest active drought.
Gailey met with his players during the team's annual exit meetings and informed at least one of his players that he expected to be fired.
Gailey addressed reporters for a little over a minute, and declined to take questions.
He thanked both Nix and team owner Ralph Wilson for the opportunity, and said he understood the reasons behind the decision. Gailey also announced that his entire staff had been fired.
"I understand this is a business. We didn't get the job done," Gailey said, reading from a Bills pad on which he had jotted down a few notes. "I've been called two other times to get things turned around, was able to do it. We weren't able to get this one done soon enough and I understand that completely."
Gailey's eyes then welled with tears when he credited Bills fans for their loyalty, and Buffalo for being a passionate football city.
"I think that the next staff will have a great opportunity for success, and make this another great football franchise," Gailey said. "This will probably be, and I say probably, but I think it will be the first place that's ever fired me that I'll pull for."
Gailey had at least one more season left on his contract.
It's the latest twirl of the coaching carousel in Buffalo.
The Bills are on their fifth coaching search since Wade Phillips was fired following the 2001 season. Phillips, who took over in 1998 after Hall of Famer Marv Levy retired, was the last coach to get the Bills to the playoffs. That was in the 1999 season, when Buffalo lost the AFC wild-card playoff to Tennessee on a last-second kickoff return, the "Music City Miracle."
Gailey took over in January 2010 after a tumultuous season in which Dick Jauron was fired in November, leaving defensive coordinator Perry Fewell to finish out the season on an interim basis.
It's unclear whether Nix will be overseeing the next coaching search. Nix was at the Bills' facility on Monday.
This was Gailey's second NFL head coaching job. He went a combined 18-16 in two seasons at Dallas before being fired following the 1999 season despite leading the Cowboys to the playoffs each year. He spent six years as head coach at Georgia Tech, where he had a 44-32 record before being fired after the 2007 season.
"It's always disappointing," said defensive tackle Kyle Williams, one of the only players left in the locker room when the team announced Gailey's firing.
What frustrates Williams more is how the Bills keep making changes without getting any results.
"I get tired of losing," Williams said. "More than anything, I get tired of putting in tons and tons of work. And it's hard sitting here talking to you guys at the end of December feeling like another one kind of slipped through your fingers."
Quarterback Ryan Fitzpatrick's status is uncertain in part because he's due a $3 million bonus in March. He went 16-29 since taking the starting job three games into the 2010 season. He hasn't lived up to the six-year, $59 million contract extension he signed in October 2011.
Fitzpatrick declined to speculate on his future. After speaking to reporters, Fitzpatrick hugged receiver Stevie Johnson and the two left with Johnson's arm over the quarterback's shoulder.
Noted for being an offensive expert, Gailey failed to revive what's been a perennially poor popgun attack. The offense did show signs of a spark last year, when it finished 14th in the NFL in yards gained. That was Buffalo's best finish since winding up 11th in 2003. The unit, however, regressed this year, and particularly unraveled down the stretch. It finished 19th in the NFL in yards gained, and 21st in points scored.
Ultimately, it was the Bills' poor defensive play that doomed Gailey, though. The troubles were particularly glaring this season, because the defense was supposed to be much improved after signing Williams to a six-year contract in free agency.
The Bills allowed 400-plus points in each of the past three seasons, including 435 this year -- the second-worst total in team history. Buffalo became the NFL's eighth team and first since the 1986 Jets to allow 45 points four times in one season.
The Bills also endured a dreadful two-game stretch in losing 52-28 to New England on Sept. 30 and then 45-3 at San Francisco the following week. They allowed franchise-worst 1,201 yards offense in consecutive games, the most an NFL team's given up in back-to-back games since the New York Yanks gave up 1,227 in two games in 1950.
"It's sickening," running back Fred Jackson said, referring to how the Bills failed to play up to expectations. "As players, we had the highest hopes out of everybody. And for us to fall short of that, we don't like it at all. It's depressing."
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