The 51-year-old Portuguese handler had pre-empted the announcement by saying he had been fired as he left the San Siro following his press conference after the draw with AS Roma on Sunday.
His compatriot Sergio Conceicao is expected to replace the former Shakhtar Donetsk, Roma and Lille coach.
The 1-1 draw was the sixth of the season and left them in seventh spot eight points off Lazio in the fourth and final Champions League place, and also a massive 12 adrift of city rivals Inter, who are challenging for the title.
"AC Milan announces that Paulo Fonseca has been relieved from his duties as Head Coach of the Men's First Team," read a statement from the club.
"The Club extends its gratitude to Paulo for his great professionalism and wishes him the very best in his future endeavours."
Conceicao has Serie A experience as a player and is available after the 50-year-old ended a seven-year spell as Porto coach in June this year.
Milan, the seven-time European champions, have been battling inconsistent form and fan anger.
Fonseca has been in open conflict with senior players and questioned his squad's commitment, repeatedly going after countryman and star winger Rafael Leao and dropping France full-back Theo Hernandez for a teenage academy player in a dismal goalless draw with Genoa earlier this month.
Meanwhile the cub's fans are on a war footing, attacking the owners on December 21 when a celebration of the club's 125th birthday was marred not just by a poor match and the very obvious absence of Paolo Maldini among the iconic players parading on the pitch, but also chants demanding that owners, US investment fund RedBird, sell up.
Supporters then turned up outside a private party for the anniversary, barracking most of the arriving players and displaying banners with messages like "a club with no ambition, you're not worthy of our history".
