I am on H1B1 and lost my job. I am looking for job, but in the mean while I was planning to move to H4 with my spouse. Do I need to leave the country for the visa status to be changed?

Priya is correct. Based on the information you have provided, you are likely out of status. You may file a petition to change to H4 status nunc pro tunc (USCIS will have the discretion to deny this.) Or, you can leave the U.S., apply for an H4 visa, and re-enter in valid H4 status. Please note that most of the other responses to your question are wrong, or just offer bad advice. You will not automatically fall into H4 status as soon as you file an application and receive the receipt. And, even if you receive severance pay, you will still be out of status. Trying to use severance pay to trick USCIS into thinking you are still employed would constitute fraud. I highly recommend against lying to the government!

No you not need to get out of the country to to get H4 visa. Your spouse's company needs to file some paperwork and your H4 status gets activated as soon as you get the reciept. Also if you do get a job that sponsors your H1 visa, you do not need any stamping on your visa.   I have all done this and know for a fact.

I'm not a lawyer but was in a similar situation in the past. If you've lost your job recently, if possible, ask your employer for couple of months of severance pay. This will help you get pay stubs and maintain H1B status. In the meantime search for a new job. If you can get a new job and get the H1B transfer filed by the new employer before end of severance pay then you can start at the new employer using H1B transfer application receipt (need not wait for the approval). If it's not possible to get pay stubs then try to find a new job as soon as possible. Get your new employer to file H1B transfer. If the H1B transfer application is filed within one month of your last day at previous job and if luck is on your side then transfer application should go through fine (though not guaranteed) Also remember it takes 1 week for LCA application which is required to file for H1B transfer.