Santos was in charge of the Portuguese national team for eight years and famously led them to European championship glory in 2016 and the inaugural UEFA Nations League in 2019.
The 68-year-old's position came under threat after Morocco knocked out Portugal in Qatar amid a reported fall out with star player Cristiano Ronaldo, who was dropped to the bench for Portugal's knockout stage games.
Santos had a contract that was supposed to run until after the 2024 European Championships but Portugal have decided to end the association early.
His departure was confirmed by the Portuguese Football Federation (FPF), which said in a statement: "The FPF and Fernando Santos agreed to end the highly successful journey that began in September 2014.
"After one of the best participations ever by the national team in the final stages of the World Cup, in Qatar, FPF and Fernando Santos understand that this is the right moment to start a new cycle.
"It was an honour to have a coach and a person like Fernando Santos at the head of the national team.
"The FPF thanks Fernando Santos and his technical team for the services provided over eight unique years and believes that this thanks is also made on behalf of the Portuguese people."
Portugal have been linked with AS Roma boss Jose Mourinho and Paulo Fonseca to replace Santos.
