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."
The statement went on: "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."
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.