Ancelotti, 65, who has had rumours swirling about his future with Los Blancos in recent months, leaves after winning two LaLiga titles, two Copa del Rey titles, as well as two Champions Leagues during his second spell at the club.
All in all, the Italian won 15 trophies as Real Madrid manager.
Ancelotti's future is already mapped out. 'Don Carlo' will be taking over the Brazilian national football team to lead them into the World Cup in 2026, a contract that is expected to start on May 28th following the end of Madrid's domestic campaign.
He will become the first ever Italian to manage the national side.
Alonso set for Real
With the post now vacated, Alonso is widely reported to be taking over, signing a three-year deal in the coming weeks, which is likely to see the Spaniard taking charge of their Club World Cup campaign in June.
His current side, Bayer Leverkusen, announced last week that Alonso would be leaving at the end of the 2024-2025 season, having won them their first Bundesliga title last year.
The former midfielder played under Ancelotti during the Italian's first spell at the Bernabeu, where they won a Champions League together, beating city rivals Atletico Madrid in the final, although Alonso played no part in the game.