The 34-year-old lost his job less than 24 hours after yesterday's Barclays Premier League defeat at West Brom, which left the Blues fifth in the table.
Chelsea confirmed in a statement on the club website that they and the Portuguese had "parted company," and also announced assistant manager Roberto Di Matteo would take charge of the team until the end of the season.
Villas-Boas was only appointed in June 2011 and cost billionaire owner Roman Abramovich £13.3million from Porto.
The club statement read: "Andre Villas-Boas has parted company with Chelsea Football Club today.
"The board would like to record our gratitude for his work and express our disappointment that the relationship has ended so early.
"Unfortunately the results and performances of the team have not been good enough and were showing no signs of improving at a key time in the season.
"The club is still competing in the latter stages of the UEFA Champions League and the FA Cup, as well as challenging for a top-four spot in the Premier League, and we aim to remain as competitive as possible on all fronts.
"With that in mind, we felt our only option was to make a change at this time.
"With immediate effect, Roberto Di Matteo has been appointed first-team coach on an interim basis until the end of the season."
Di Matteo's appointment appears to end speculation that former Liverpool boss Rafael Benitez would be parachuted into Stamford Bridge until the summer.
Villas-Boas had been under mounting pressure after overseeing what was threatening to be Chelsea's worst season since Abramovich bought the club almost nine years ago.
A run of just five wins from the last 16 games saw the Blues slide out of the top four, while they remain in real danger of crashing out of both the Champions League and FA Cup in the next week and a half.
Brought in to revamp an ageing squad after winning an incredible quadruple at Porto last season, Villas-Boas' reign was dogged by reports of the kind of dressing-room unrest that previous Chelsea managers have said led to their own downfall.
Abramovich, who reportedly hand-picked Villas-Boas last summer when Guus Hiddink had been the favourite to succeed Carlo Ancelotti, appeared prepared to be more patient with the 34-year-old than previous bosses.
The Russian seemingly recognised the difficulties in overhauling the squad and the playing style at Stamford Bridge.
But, as when Luiz Felipe Scolari was sacked three years ago, it was fear of not qualifying for the Champions League that prompted Abramovich to act.
Having repeatedly insisted he had the owner's full backing during the recent run, Villas-Boas appeared to acknowledge the writing may be on the wall recently.
An interview with a Portuguese radio station saw him admit for the first time he could lose his job, a possibility he refused to shy away from after yesterday's defeat at the Hawthorns.
He said: "Will this result increase pressure on me? You have to agree with it. We are in the same position, fifth, but we are now three points behind Arsenal.
"It is a big, big disappointment. Every defeat Chelsea suffers piles more pressure on any manager."
Villas-Boas insisted it would not help his position being given public backing from Abramovich.
He said: "I don't think so. There is no need for the owner to back us after such a poor display."
Villas-Boas, who on Friday insisted he would "never" quit Chelsea, added: "Am I the right man for the job? Yes. I wouldn't have taken it if I didn't think that."
Di Matteo's first game in charge will be Tuesday's FA Cup fifth-round replay at Birmingham.
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