Capello's deal had been due to run until the end of the 2018 World Cup finals in Russia, but ends with the national team struggling to qualify for Euro 2016 and the RFS having found it difficult to pay his wages in recent times.
It was reported in February that Arsenal shareholder Alisher Usmanov had stepped in with an emergency loan to enable the RFS to pay Capello 400million roubles (£3.9m) in backdated wages.
However, the RFS confirmed in April that there were still ongoing issues regarding the Italian's salary. Russia are third in their Euro 2016 qualifying group after a 1-0 loss to Austria last month.
A statement on the RFS' official website read: "[The] Russian Football Union and head coach of the national team of Russia Fabio Capello reached an agreement to terminate the employment contract by mutual agreement.
"[The] RFS sincerely thanks Fabio Capello for his work as head coach and wish him success in his future career. Fabio Capello, in turn, thanks the RFS for their help and support he has felt throughout the years.
"He is also grateful to the players for working together, and the fans - for their sincere support of the team."
Capello led Russia to the World Cup finals for the first time in 12 years in 2014, but saw his side eliminated in the group stage.
The 69-year-old had previously been in charge of the England national team, overseeing a disappointing World Cup campaign in which they were knocked out in the second round before resigning in 2012.
In club football, Capello has won seven league titles in three countries and lifted the UEFA Champions League trophy with Milan in 1994.
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