The 51-year-old Portuguese coach anticipated the decision, announcing his departure as he exited the San Siro following a press conference after the 1-1 draw with AS Roma on Sunday.
Sergio Conceicao, his fellow countryman, is likely to take over the coaching role. Conceicao previously managed Shakhtar Donetsk, Roma, and Lille.
The recent draw marked the team's sixth of the season, leaving them in seventh place, eight points behind Lazio, who occupy the fourth and final Champions League spot, and a significant 12 points behind city rivals Inter, who are in contention 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, who has experience in Serie A as a player, is currently available after concluding a seven-year tenure as Porto's coach in June.
Milan, a seven-time European champion, has been grappling with inconsistent performances and growing discontent among fans.
Fonseca faced open disputes with senior players and questioned the commitment of his squad, notably criticizing star winger Rafael Leao and opting to bench France full-back Theo Hernandez in favor of a young academy player during a disappointing goalless draw with Genoa earlier this month.
Meanwhile, the club's supporters have expressed their frustration, confronting the owners on December 21 during a celebration of the club's 125th anniversary, which was overshadowed by a lackluster match and the notable absence of Paolo Maldini among the legendary players on the pitch. Fans chanted for the US investment fund RedBird, the club's owners, to sell, and they gathered outside a private anniversary party to voice their discontent, displaying banners with messages like “a club with no ambition, you’re not worthy of our history.”