Milan have endured a disappointing start to the season despite some heavy investment over the summer, winning just two of their last nine league games to find themselves seventh in the Serie A table and already 18 points adrift of leaders Napoli.
Sunday's goalless draw at home to Torino proved to be the final straw for the board, who have now parted company with Montella and brought in another former player in Gattuso.
"AC Milan announces that they have parted ways with Vincenzo Montella from the post of coach of the first team," read a club statement on Twitter.
"Management of the first team is entrusted to Gennaro Gattuso, who leaves his position as Primavera coach and to whom we wish the best of luck."
Gattuso made 468 appearances for Milan during his playing career, helping the club to two Serie A titles, one Coppa Italia and two Champions League crowns.