The veteran coach was dismissed alongside senior executives Giorgio Furlani, Igli Tare, and Geoffrey Moncada as part of a sweeping overhaul aimed at restructuring the club's football operations for next season.
Allegri concluded an abysmal second half of the Serie A season with a 2-1 home defeat to Cagliari on Sunday, with his side winning just one of their final four matches.
"After the disappointment of last year, the mandate ownership set for the Club was to return to the Champions League and to establish a foundation for winning consistently at the top of Serie A," Milan said in a statement.
"For the majority of this season, we were in the top two positions in Serie A, with a credible shot at competing for the Scudetto. The final stretch was completely inconsistent with the performance up to that point, with last night’s disappointing loss in the final game turning the season into an unequivocal failure.
"It is now time for change and a comprehensive reorganisation of football operations. Effective immediately, we are parting ways with CEO Giorgio Furlani, Sporting Director Igli Tare, Head Coach Massimiliano Allegri and Technical Director Geoffrey Moncada. We thank each one for their hard work and dedication to AC Milan during their respective tenures.
"Further announcements regarding the next appointments will be made in due course - with the goal to be ready and well prepared for the next season."
Allegri returned for a second spell at AC Milan this season, having previously led the club from 2010 to January 2014. The team maintained a sustained challenge for the Serie A title for much of the campaign, but saw a sharp decline in form at the end of the campaign that led to his dismissal.