His assistant Willy Sagnol has been placed in charge of the first team until further notice.
Ancelotti, who took over from Pep Guardiola in 2016 and led the record German champions to their fifth straight Bundesliga title last season, was informed of the club's decision to part company following their return from the French capital on Wednesday.
Bayern's defeat in France comes after they fell three points behind league leaders Borussia Dortmund on Matchday 6 – falling so far off the pace at the top of the Bundesliga at such a stage of the season for the first time since 2010/11, when Dortmund went on to win the title and Bayern finished third.
Watch: Bayern held by Wolfsburg in Ancelotti's final Bundesliga fixture
"The performance of our team since the start of the season did not meet the expectations we put to them,” said Bayern CEO Karl-Heinz Rummenigge. “The game in Paris clearly showed that we had to draw consequences. Hasan Salihamidzic and I had an open and serious discussion with Carlo today and informed him of our decision.”
“I would like to thank Carlo for his cooperation and regret the latest developments. Carlo is my friend and will remain so, but we had to make a professional decision in the interests of FC Bayern. I now expect the team to have a positive development and top performance, so we can reach our goals for this season.”