The Chile based Pellegrini has been cut short of his contract of two years after Madrid finished second place in the La Liga this season.
Pellegrini was signed to bring back domestic and European glory to the club, on the back of Barcelona's treble of La Liga, Copa del Rey and Champions League triumphs in 2009.
Madrid had made a whopping 252 million pounds signing in players like Kaka, Cristiano ronaldo, Karim Benzema and Xavi Alonso but the club failed to win any major trophy.
With Real's reputation for sacking managers, Pellegrini's future always appeared in doubt - Vicente del Bosque is the only boss to have overseen more than 100games at the club since 1989.
Real Madrid President Florentino Perez revealed the decision in a press conference held on wednesday. He said he was thankful for Pellegrini's hard work, his professionalism and his conduct during his stay with the club.
"The change of coach is always difficult, but we are convinced that after this first year and this first phase, now is the moment to give a new impulse to our project," as quoted on soccernetespn.
Meanwhile, Jose Mourinho is confident that he will make his move to Spanish club Real Madrid although the announcement is yet to be made and his future will only be decided after the World Cup.
The club board members are waiting for Mourinho's contract to be over with Inter Milan. The 47 year old portugese been hitting the headlines for his tremendous contribution as a manager this year winning the champions league and the home league for Inter Milan and has already revealed that he wants to leave the club.
"There is nobody on the board who has given an opinion against the signing of Jose Mourinho, on the contrary, they are enthusiastic at being able to recruit one of the best coaches in the world," said Perez.
"We are 100% behind the need for a change and we are very happy that Jose will be the man to take over the reins at Real Madrid,"he added