Ancelotti oversaw Napoli's progress from Group E, finishing second behind Liverpool by a point, after a 4-0 win over Genk, but that was not enough to save the 60-year-old.
The former Chelsea, AC Milan, Real Madrid and Bayern Munich manager - who has won the Champions League three times - has been dismissed as a result of Napoli's poor domestic form, having failed to win in their last seven Serie A matches.
The Italian club sit seventh in the league and their win against Genk was their first in 10 matches in all competitions.
A club statement read: "SSC Napoli has decided to revoke the role of first-team coach from Mr Carlo Ancelotti.
"The rapport of friendship, admiration and reciprocal respect between the club, its President and Carlo Ancelotti remain intact."
However Ancelotti may not be out of work long, with managerless Arsenal and Everton already monitoring the ex Chelsea manager's movements, while West Ham could also speed up the departure of Manuel Pellegrini with the knowledge that Ancelotti is now a free agent.
Ancelotti won the Premier League and FA Cup Double with Chelsea in 2009-10 and is now 11/10 with Sky Bet to become the new Everton, 2/1 to step into the Emirates Stadium dugout and 33/1 to switch to the Hammers.
Sky Sports report that Everton are in the driving seat, moving quickly to already arrange contract discussions later this week.
The Toffees had been after Shanghai SIPG boss Vitor Pereira, however he has since ruled himself out of a move to Goodison Park, telling Sky Sports: "At this point I am still the coach of SIPG a club close to my heart in a country that is growing immensely in football.
"Currently I am not in a position to make any other commitments."
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