The Italian left his post less than two hours after the final Barclays Premier League game of the season at Everton, which the Blues lost 1-0.
Ancelotti is believed to have been given his marching orders by chief executive Ron Gourlay after completing his post-match media duties.
Over and out: Carlo Ancelotti suffered defeat in his final game against Everton
Ancelotti was under serious pressure from owner Roman Abramovich, despite winning the Double in his debut season.
Chelsea will now start the search for a new manager with Guus Hiddink, Marco van Basten and Andre Villas-Boas among the contenders.
A Chelsea statement read: 'Chelsea Football Club can confirm that Carlo Ancelotti parted company with the club.
'The owner and board would like to thank Carlo for his contribution and achievements since taking over as manager in July 2009, which included winning the Double for the first time in the club's history.
All smiles: Ancelotti greets David Moyes before the match at Goodison Park
'However, this season's performances have fallen short of expectations and the club feels the time is right to make this change ahead of next season's preparations.
'Carlo will always be welcome at Stamford Bridge, where he will be given the reception and respect his position in our history deserves.
'Chelsea's long-term football objectives and ambitions remain unchanged and we will now be concentrating all our efforts on identifying a new manager. There will be no further comment until that appointment is made.'
This has been Chelsea's worst season since Roman Abramovich bought the club in 2003.
Rumours Ancelotti was to depart grew after the club crashed out of the Champions League quarter-finals against Manchester United and his fate was ultimately sealed when a late title charge ended with defeat to the same opponents.
Final stand: Ancelotti watches on during his last moments at Chelsea boss
Speaking after his side's defeat at 10-man Everton, Ancelotti said: 'I am now on holiday - but I am not sure how long my holiday will be!
'We haven't arranged any meeting but I think in the next week, now the season is finished, the club can address my job and they will take a decision.
'I have to wait and see what happens. I don't have to say anything to the club - they can judge me on my job for two years.'
The Toffees made most of the running and continued to dominate even after Seamus Coleman was sent off in the 53rd minute.
End of the road: Everton celebrate Jermaine Beckford's goal on Sunday
Their reward came 15 minutes from time when Jermaine Beckford scored a superb length-of-the-field winner.
Ancelotti said: 'We would have liked to finish the season differently but unfortunately we were not able to.
'It was difficult to be motivated today, even when we had one more player in the second half. After we lost against Manchester United, when we were fighting for the title, it was difficult because we had second place easily.
'This is normal at the end of the season. We worked really hard until we lost the fight for the title with United. To maintain the motivation was not easy.'
Reunion? Roman Abramovich (centre) may be tempted to bring back Guus Hiddink
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Source: Daily Mail
Source: Daily Mail