"Matthaus's contract will not be renewed," BFU president Borislav Mihaylov told reporters. "Bulgaria achieved poor results under him and there's tension between him and the players."
Matthaus, who last September became the first foreigner to coach Bulgaria since 1966, achieved little success with the team, who are already out of the running for the Euro 2012 finals.
"He lived outside Bulgaria for most of the time and perhaps it also influenced the results and preparation of the national team," said Mihaylov.
Matthaus, 50, had signed a one-year contract with an option for two more years when he replaced Stanimir Stoilov. He led Bulgaria to only three wins - two of them in friendlies - in 11 games over the last year.
In the Euro 2012 qualifiers, Bulgaria lost at home to Group G leaders England 3-0 and they were beaten 3-1 by Switzerland earlier this month, leaving them fourth in the standings and out of the running for the finals.
An online poll of more than 32,000 fans showed that Matthaus's popularity had plummeted, with 87 percent of the respondents saying they had no confidence in him.
Last month, Matthaus, who captained West Germany to success at the 1990 World Cup and won a record 150 caps, agreed to extend his contract until 2013 but pressure on him has increased enormously in recent weeks.
The BFU said Bulgaria's Under-21 team coach Mihail Madanski would take charge until a replacement was found.
Madanski, who will be in charge for Bulgaria's friendly against Ukraine on October 7 and the final Euro 2012 qualifier against Wales four days later, said he would take the opportunity to rejuvenate the team.
"I think this is the right time for a total rejuvenation in the team," Madanski told local media.
He took a side-swipe at Matthaus, saying: "Matthaus is a great man and a good coach but he wasn't aware of our footballing reality.
"I hope there'll be no talk about beer and women when I'm in charge. It'll be good to talk about football."
Madanski said Sporting Lisbon striker Valeri Bojinov and PSV Eindhoven defender Stanislav Manolev, who had clashed with Matthaus, would be part of his new-look team.
