The Italian coach has been widely expected to leave the Santiago Bernabeu this summer after a disappointing end to the 2014-15 season, which saw Madrid lose out to Barcelona in the Liga title race and exit the Champions League at the semi-final stage at the hands of Juventus.
The reigning European champions have now confirmed they have parted ways with the man who delivered La Decima to the club.
Ancelotti delivered four trophies at Madrid in a remarkable 2014, as the Blancos won the Copa del Rey, Champions League, European Super Cup and Club World Cup.
The former Paris Saint-Germain boss has been linked with a return to AC Milan, where he won Serie A and two Champions League titles, with Rossoneri CEO Adriano Galliani heading to the Spanish capital to meet with Ancelotti. Rumours in England also linked West Ham with a shock approach for the former midfielder.
However, the 55-year-old confirmed after Madrid's 7-3 thrashing of Getafe that he intends to take a year's sabbatical from the game in order to undergo surgery on a nervous complaint.
Napoli boss Rafa Benitez is the favourite to succeed Ancelotti at Santiago Bernabeu.
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