The Italian giants are 11th in the standings, having won just five of their 19 games in the ongoing season.
Allegri was due to leave the side on conclusion of his tenure at the San Siro, but will have to pack his bags earlier than expected alongside his backroom staff.
Assistant coach Mauro Tassotti has been ordered to take charge of the first-team on temporary basis.
"Massimiliano Allegri and his staff have been relieved of their duties," read the club's statement.
"AC Milan would like to thank Mr. Allegri and his staff for their time with the club and wishes them the best of the future."
Allegri led Milan to a Serie A title in his first season in charge after replacing Leonardo in June 2010.
They were runners-up in 2012 but finished last season's campaign 15 points behind winners Juventus.
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