Montella took charge of AC Milan in June 2016.
The club are seventh in Serie A with 20 points, 18 behind leaders Napoli, after a run of only two league victories in their past nine games.
They drew 0-0 with Torino at home on Sunday and have lost six of their 14 top-flight matches this season.
Gattuso, a former AC Milan midfielder, steps up from managing the club’s youth side.
The 39-year-old Italian played for Milan between 1999 and 2013, winning the Serie A title and the Champions League twice.
He will appear at a news conference at their Milanello training ground on Tuesday.
Following his sacking, Montella posted a statement on social media in which he said it had been an “honour” to have coached the side.
AC Milan, who have won the Italian title 18 times and are seven-time European champions, have not finished in the top three in Serie A since 2013.
They have spent £205m on new signings since Chinese businessman Li Yonghong took control in April last year.
“We are very grateful to Mr Montella and his staff for all the work done up to today, their commitment and professionalism,” said an AC Milan statement.
BBC
