Real Madrid president Florentino Perez hailed Jose Mourinho as a part of the club's history as he announced the coach's imminent departure.
Perez confirmed at a press conference on Monday evening that Mourinho will leave the club at the end of this season, his third at the Bernabeu.
The controversial Portuguese, who led the club to Primera Division title success last season with a record 100 points and to three successive Champions League semi-finals, has been strongly linked with a return to his former club Chelsea.
Perez said: "I want to inform you all that, after speaking to Jose Mourinho, we have decided to terminate his contract at the end of this season. We both agree that this is the right time.
"It is a sad day, but I wish Mourinho the best. This club will always remember him, he forms part of our history.
"Mourinho has spent more time at this club than any other coach has at the 20 clubs in the Primera Division, which shows it is not easy to last at a club for three years, especially at a club where there is as much pressure as this one.
"Each coach has his own personality, but you cannot doubt his competitive attitude. Has he made mistakes on the odd occasion? Of course, but the level of pressure at this club is not normal.
"On behalf of the board of directors, I would like to thank Jose Mourinho for the work he has done. We have taken an important step forward in a sporting and competitive sense under him, and we wish him luck in the future."
Mourinho's departure was agreed mutually by coach and club and Perez also confirmed he will receive no compensation payment.
Mourinho will take charge of Real Madrid's final matches of the Primera Division season, away to Real Sociedad on 26 May and at home to Osasuna the following weekend.
"No-one has been sacked, no-one has quit, it was a mutual agreement," said Perez.
"It's not an ideal situation that he is leaving, but after three years we both agree it was the right time to end this relationship.
"He believes the best thing is if he leaves the club and I share his reasons. It's the right decision to start a new project."
Speculation will now surround not just Mourinho's eventual destination, with the 50-year-old widely expected to succeed Stamford Bridge interim manager Rafael Benitez, but also his replacement in Madrid.
Paris St Germain coach Carlo Ancelotti has been touted as the front runner to become the new coach of Madrid, and admitted on Sunday he had met with his current club's president Nasser Al Khelaifi and director of football Leonardo to inform them of his desire to leave the Ligue 1 champions and join Madrid.
Al Khelaifi confirmed that but reiterated the club want the Italian to see out his contract, which expires in 2014.
Perez said: "A few days ago the president of PSG spoke to one of our directors about the possibility of Carlo Ancelotti leaving the club to join Madrid.
"They told us it was not possible and we respect that."
Mourinho leaves Madrid having won one league title, one Copa del Rey and one Spanish Super Cup in a three-year tenure.
Perez defended the coach's record at the club when asked if the Portuguese's time there could be seen as a failure.
He said: "Everything is related to where we came from. We had been eliminated in the last 16 of the Champions League for six years and were not seeded.
"Now we are among the top four teams in Europe, always in the semi-finals or finals. The overall picture is positive.
"If you asked all the clubs in Europe if they'd be satisfied to reach the Champions League semi-finals three years in a row, they'd say yes. For us, it's not enough, because of what we demand. We are always obliged to improve ourselves."
"Right now the club is in the position it should be in. The word failure is not fair, you now need to get 100 points to win this league.
"Last year we were delighted with ourselves, we were playing spectacular football and beat every record.
"This year it has not been enough for us to get to the semi-finals of the Champions League, the final of the Copa del Rey and coming second in the league. That is what makes Madrid such a great club, we are very demanding, our culture is winning."