President Florentino Perez revealed at a press conference that Mourinho's time in charge at Estadio Santiago Bernabeu is coming to an end by mutual agreement once the 2012-13 season has reached a conclusion.
The announcement comes after a disappointing spell saw Madrid knocked out of the Champions League by Borussia Dortmund in the semifinals and defeated by rival Atletico Madrid in the Copa del Rey final, while Barcelona celebrated La Liga glory.
“The club and manager believe the time is right to bring our relationship to an end,” Perez said. “I would like to thank Jose Mourinho for all his hard work over the last three years. The team has improved over his time here and I would like to wish him all the best.
"The achievements of this season have not been sufficient for the demands of a club such as Real Madrid, or a coach like Mourinho."
Perez admitted the subject of Mourinho's future has been on the club's agenda for some time, but insisted a final decision has only been reached now and there is no agreement in place for his replacement despite suggestions Carlo Ancelotti has already agreed on a deal.
"We have come to this decision just now, although it's something that has been at the back of our mind for some time," Perez said. "We have no pre-contract signed with any manager. This is something we have to look at over the coming days."
Mourinho, meanwhile, has been heavily speculated to return to Chelsea, which is looking for a permanent replacement to interim boss Rafa Benitez.