The last-placed Dragons had already been on the longest losing streak in club history before Saturday's 30-12 loss to South Sydney made it 11 in a row.
Club bosses settled on Flanagan's departure by "mutual agreement" on Monday morning, less than nine months after tying the 2016 premiership-winning coach to a two-year contract extension.
"This is clearly a significant moment for the club," chief executive Tim Watsford said at Monday's snap press conference in Wollongong.
"We understand the disappointment and frustration our members and our fans feel, and we know that results and performances have not met expectations for this proud club."
Flanagan did not have the chance to begin his new contract, which had been set to start next year.
But Dragons chair Andrew Lancaster felt the club needed to act regardless of the deal, with pressure on Flanagan intensifying after the 32-0 loss to North Queensland in round five.
"As a club, as an employer, there is a duty of care, not just to the club, to its supporters, its fans but a duty of care to our employees," Lancaster said.
"A lot of what has transpired over the last week, the conversations we've had, have been about that."
The Dragons have also parted ways with Ben Haran, the general manager of football who had presided over the club's underachieving playing list.
Lancaster insisted neither had been fired, taking exception to a question about moving on from Flanagan, who took over for the 2024 season.
"You say 'moving on'. That's not what we just said. We talked about a mutual agreement," Lancaster said.
"We've been talking to Shane the whole time. This is an organisation, it's a sporting club, we talk to our head coach on a regular basis.
"These conversations, whilst (they) didn't get to an outcome until this morning, these conversations have been taking place."
As recently as the post-match press conference for Saturday night's loss - the Dragons' seventh this season - Flanagan had insisted he remained the right man to coach the team.
Flanagan's former assistant coach Young was announced as interim replacement ahead of Tuesday's board meeting and is tasked with helping the club avoid its first wooden spoon as a joint venture.
His first game in charge is the most important fixture of the Dragons' regular season: the traditional Anzac Day clash against the Sydney Roosters.
Young has long been tipped as head-coach material and took over when the Dragons fired Paul McGregor mid-season in 2020.
The 42-year-old has also spent time on the coaching staff at North Queensland and NSW in State of Origin.
"It's a privilege to lead this club," Young said in a statement.
"This current group of players mean a lot to me. I want to support them through this transition."
Young was selected for the interim vacancy ahead of fellow Dragons assistant coach Michael Ennis as the club begins its search for the next full-time coach.
"Whoever takes control of this club understands that there will be a significant amount of pressure and expectation," Lancaster said.
Young and his former Dragons teammate Ben Hornby, an assistant at South Sydney, are both considered chances to coach the struggling club from 2027.
The Dragons will offer support to Flanagan's son Kyle, the team's highly scrutinised halfback who remains contracted until the end of 2027.
"We'll provide every means possible to support Kyle. And as we have been, we'll continue to support Shane," Watsford said.
