The club said in a statement: " Xabi Alonso will always be loved and admired by all Real Madrid fans , because he is a legend of the club, and has represented its values throughout the ages. Real Madrid will always be his home."
He added that Arbeloa, the second team coach and former Real Madrid defender, will take over coaching the first team.
The decision came after Real Madrid lost the domestic Super Cup title, following a 2-3 defeat to arch-rivals Barcelona on Sunday.
Real Madrid parted ways with Alonso just over 7 months after his appointment, following a string of poor results in all competitions.
Alonso took charge of the team he played for last May, on a three-year contract after a successful coaching stint with German club Bayer Leverkusen.
The former Spanish international led Leverkusen to win the German league title in the 2023-2024 season, along with winning the German Cup and reaching the Europa League final, which prompted Real Madrid to bring him back to the club as a coach.
However, Alonso was unable to replicate the success of Zinedine Zidane , who played in the same position for the club and led them as a coach to win the Champions League three times in a row.
Alonso's appointment was initially seen as a long-term project, but his dismissal suggests the club's impatience.
Alonso's tenure was marred by internal disputes, amid reports of clashes with senior players, including Federico Valverde and winger Vinicius Junior.
Under Alonso's leadership, Real Madrid suffered heavy defeats against Paris Saint-Germain in the Club World Cup, against Atletico Madrid in the Spanish League, and against Liverpool in the Champions League.
Arbeloa will take over immediately and will be in the technical area when Real Madrid visit second-division side Albacete for their Copa del Rey round of 16 match on Wednesday.
After leading the league standings earlier this season, by 5 points over Barcelona, Real Madrid has dropped to second place, 4 points behind the defending champions.
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