The Italian coach was informed of the decision on Monday, by club president Florentino Perez.
Following a lengthy board meeting at the Santiago Bernabeu, a formal press conference was held at just after 8pm local time, in which club president Florentino Perez officially announced his and the board's decision.
Whilst the news comes as no surprise, given the huge speculation in the Madrid media over the last few weeks, with numerous replacement candidates put forth by the Spanish press, the decision taken by Real Madrid has been far from an easy one to take.
Such was the tone from Florentino, as he began: "My appearance will be brief. I'm here to announce the decision of the board to relieve Carlo Ancelotti of his duties as Real Manager."
"It has been a very difficult decision to take, but we believe it was the best one to make, for an for such a leading institution in the world."
Florentino then recognised: "The demands here are utmost and we need a new impulse. We have a great team and we're certain that we'll offer further satisfaction to our club members."
Having being a staunch backer of the Italian coach during the course of the season, the Real Madrid supremo highlighted: "I want to publicly thank Carlo, we're grateful for all his hard work over the last two years."
Then came the declaration from Florentino: "Next week we will announce who the new manager of Real Madrid will be." Although he refused to indicate any names for the post, when journalists probed with questions, as to who will be Ancelotti's successor.
As for Ancelotti's immediate managerial future, question marks remain as to whether he'll seek a new challenge swiftly, or take an entire year out of football.
Despite speculation linking him with a return to AC Milan, who are sending the strongest of signals they'd like him back, or more spectacular claims of an approach from West Ham United and a return to the Premier League, the Italian has already indicated health grounds will affect his decisions.
In comments to Italian newspaper Il Giornale over the weekend, the 55-year-old revealed: "If I'm sacked, I'll stop for a year and for a serious reason."
That reason is a neck complaint that causes tingling sensations in his hands. As such, Ancelotti plans to have that problem resolved with treatment in Canada, followed by a more relaxed, stress-free recovery period, which can't be achieved whilst working.
The departure of Ancelotti will clearly be seen as a blow for the players, who had shown him their staunch support, over recent days. Likewise, following surveys in leading Madrid outlets AS and Marca, it appears the majority of fans also wanted him to remain in charge.
Winning the long-awaited 'Decima' of the Champions League, along with the Copa del Rey during his first season in charge, quickly endeared Ancelotti to the ever-demanding Real Madrid fans.
The team also made an excellent start to the 2014-15 campaign, winning the UEFA Super Cup and then the FIFA World Club Cup, amidst a record-breaking run of form during the first half of the campaign.
However, 2015 didn't start well and the team suffered a significant dip in form, by Real Madrid standards, which coincided with the start of a remarkable run of form by arch-rivals and eventual La Liga champions, Barcelona.