Capello resigned following a meeting with FA chairman David Bernstein and general secretary Alex Horne at Wembley Stadium.
An FA statement read: "The Football Association can confirm that Fabio Capello has today resigned as England manager.
"This follows a meeting involving FA chairman David Bernstein, FA general secretary Alex Horne and Fabio Capello at Wembley Stadium.
"The discussions focused on the FA board's decision to remove the England team captaincy from John Terry, and Fabio Capello's response through an Italian broadcast interview.
"In a meeting for over an hour, Fabio's resignation was accepted and he will leave the post of England manager with immediate effect."
Capello told ANSA, the national Italian news agency: "I leave England and I will not say anything else."
Bernstein said the resignation was the right course of action.
The FA chairman said: "I would like to stress that during today's meeting and throughout his time as England manager, Fabio has conducted himself in an extremely professional manner.
"We have accepted Fabio's resignation, agreeing this is the right decision. We would like to thank Fabio for his work with the England team and wish him every success in the future."
Bernstein and the Club England management team will hold a media conference at Wembley at 12 noon on Thursday.
The shock resignation brings an end to Capello's four years in charge of England - he had been due to step down after the European Championship and leaves the FA needing to appoint a replacement as soon as possible.
The next international is later this month, a friendly against Holland on February 29 at Wembley.
The timing of the meeting coincided almost exactly with Tottenham boss Harry Redknapp, the outstanding candidate to replace Capello, being cleared of tax evasion charges.
The FA's decision to go over Capello's head and strip Terry of the captaincy until after his July court case where he will deny racially abusing QPR's Anton Ferdinand led to the Italian quitting his £6m-a-year post.
Capello told Italian TV that he "absolutely" disagreed with the action against Terry and that set him on a collision course with the FA.
Stuart Pearce, manager of England Under-21s and the Great Britain Olympic team, is expected to be put in charge for the Holland friendly.
FA head of elite development Gareth Southgate confirmed that Redknapp is one of the "leading candidates".
Southgate told BBC Sport: "Stuart Pearce is in the building and with the Under-21s.
"But you have to think for the summer - can you get the person you want for the longer term? Because the leading candidates are with clubs at the minute.
"Harry Redknapp is one of leading candidates but Tottenham will have something to say about that and [Tottenham chairman] Daniel Levy is not going to want Harry to leave without a fight, so there's an awful lot to work out in the next few weeks."
England Captain First Game Euro 2012 Finals. Click here to bet.
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