The decision was made today by Russian billionaire owner Roman Abromovich following Chelsea's defeat at the hands of West Brom yesterday.
Villas-Boas had failed to impress during his time at Stamford Bridge, during which there was some highly documented dressing room unrest.
Former West Brom manager Roberto Di Matteo, now first-team coach, will take charge until the end of the season.
The timing of the decision comes as Chelsea face a pivotal part of their season with crucial home and away games.
Following Arsenal's impressive win at Anfield yesterday, the task to secure top four football next season has become even more difficult for the Pensioners.
While the financial rewards of being at the Chelsea helm are undoubted, many potential managerial candidates will view the position as untenable.
The man who will be chosen to replace Villas-Boas will become Chelsea's seventh manager in seven years.