Fonseca has overseen a disappointing start to the season which sees Milan sit eighth in Serie A - 14 points adrift of leaders Atalanta.
The last straw came in Sunday night's 1-1 draw at home to Roma.
Milan announced Fonseca's departure on Monday morning with a 41-word statement on the club's social media channels.
It read: "AC Milan announces that Paulo Fonseca has been relieved from his duties as Head Coach of the Men's First Team. The Club extends its gratitude to Paulo for his great professionalism and wishes him the very best in his future endeavours."
Ex-Porto manager Sergio Conceicao is widely expected to replace Fonseca at the San Siro.
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If Conceicao is in position by January 3, his first match in charge would see him come up against his own son.
Winger Francisco Conceicao is currently on loan at Juventus from Porto - and the Old Lady face AC Milan in a Supercoppa Italiana semi-final on Friday.
The 50-year-old spent six years in Serie A during his playing career including a stint at Milan's city rivals Inter.
Conceicao is without a club after leaving FC Porto in June just nine days after leading them to Portuguese cup success.
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As for Fonseca, his spell in Milan will be viewed as a huge disappointment after a period of relative success under Stefano Pioli.
The sacking would not have come as any surprise to Fonseca who bizarrely plotted his own downfall prior to Monday's confirmation.
Despite pouring cold water on a potential exit in his post-match interview, Fonseca later told reporters that his time with the Rossoneri was up.
Quizzed on his future as he left the stadium in his car, Fonseca revealed that he had helped crunch talks with club directors.
"Yes. I left Milan," he revealed. "That's life, that's how it is. I have a clear conscience, I did everything I could do."
Milan sit seven points outside of the Champions League qualification places and club chiefs hope a change of management can help instil some impetus in the second half of the season.
There is still plenty to play for both domestically and in Europe with Milan currently 12th in the Champions League table and set to at least qualify for February's play-off round.
Senior figures at the club will hope the change may improve relations with the club's Ultras who have vented their anger at the direction of the club in recent weeks.
Protests have taken place at various Serie A matches of late with the most recent air of discontent shown at Sunday's clash with Roma.
Owner Gerry Cardinale and the board have been the main target of the boo-boys.
The Ultras want American business Cardinale to sell the club and have been vocal about their desire with chants of, 'We're Milan', We're not American and 'This club doesn't deserve us'.