Keller was promoted to role of head coach in December 2012 after previously working with Schalke's Under-17 team.
The 43-year-old guided the Gelsenkirchen side to fourth place by the end of the 2012-13 campaign, subsequently securing a spot in the UEFA Champions League.
Keller went one better in the previous campaign as Schalke finished third in the Bundesliga and once again ensured a place in Europe's premier competition.
However, Keller has paid the price for an inconsistent start to the season that has seen Schalke take just eight points from seven league matches, while they also exited the DFB-Pokal to Dynamo Dresden in August.
The club have also started with two 1-1 draws in the Champions League, albeit one of those a valuable point at Chelsea, and a 2-1 defeat at Hoffenheim last Saturday has sealed Keller's fate.
In his place comes Di Matteo, who has been without a club since he was dismissed by Chelsea in November 2012.
The 44-year-old, who enjoyed a six-year spell as a player at Stamford Bridge, led the club to arguably their greatest achievement when they defeated Bayern Munich on penalties in the 2012 Champions League final, while he also clinched the FA Cup in the same season.
As well as Chelsea, the Italian has also enjoyed coaching spells with Milton Keynes Dons and West Brom.
