The Blues suffered a 1-0 away loss to West Bromwich Albion on Saturday, a result that leaves the club three points behind Arsenal who occupy the final Champions League position.
Despite making a solid start to the season, Chelsea have struggled of late and have only picked up three league wins in their last 12 games, while they are on the verge of a Champions League exit, trailing Napoli 3-1 after the first leg.
The west London club released a statement on their official website confirming the decision to remove the Portuguese trainer from his position.
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"The board would like to record our gratitude for his work and express our disappointment that the relationship has ended so early.
"Unfortunately the results and performances of the team have not been good enough and were showing no signs of improving at a key time in the season.
"The club is still competing in the latter stages of the Uefa Champions League and the FA Cup, as well as challenging for a top-four spot in the Premier League, and we aim to remain as competitive as possible on all fronts.
"With that in mind we felt our only option was to make a change at this time.
"With immediate effect Roberto Di Matteo has been appointed first team coach on an interim basis until the end of the season."
Di Matteo's first game as head coach will be the FA Cup replay against Birmingham City on Tuesday.